Allure Company planned to raise $100,000 by issuing bonds. The bond certificates were printed bearing an interest rate of 8%, which was equal to the market rate of interest. However, before the bonds could be issued, economic conditions forced the market rate up to 9%. If the life of the bonds is 6 years and interest is paid annually on December 31, how much will Allure receive from the sale of the bonds

Sale of the Bond Price = $95,514

Explanation:

dа ta:

Coupon Rate = 8%

Face Value (F) = $100,000

Coupon (C) = 100,000 * 8% = $8,000

Market Rate (r) = 9%

No. of periods (n) = 6

Price = ?

Formula:

Bond Price = C * 1 - (1+r) ^-n + F

r (1+r) ^n

Solution:

Bond Price = 8,000 * 1 - (1 + 0.09) ^-6 + 100,000

0.09 (1+0.09) ^6

Bond Price = $95,514

The issue Price will be less than $ 100000 because the 9 % market rate of interest was more than the stated (coupon) rate.

Explanation:

Because the interest rate of market rate is above the coupon rate, so the buyers of the bond will be ready to pay less than the bond face value what this means is that, a discount would be issue by the bond.

Since the coupon rate is 8 % and the market interest rate is 9 % we conclude that issue price will be less than face value that is $ 100000.