Raiders Company issues a bond with a stated interest rate of 10%,face value of $50,000,and due in 5 years.Interest payments are made semi-annually.The market rate for this type of bond is 12%.What is the issue price of the bond?

Question

Quizplus · Accepted Answer

The issue price of the bond is calculated by discounting the future cash flows (interest payments and face value) at the market rate of 12%. Since interest is paid semi-annually, the market rate per period is 6%, and there are 10 periods. The bond's price is the present value of the annuity (interest payments) plus the present value of the lump sum (face value).

Raiders Company Issues a Bond with a Stated Interest Rate