Question

a)     Three year bonds are issued at face value of Sh100, 000 on Jan. 1, 2007, and a stated interest rate of 8%. Calculate the issue price of the bonds assuming a market interest rate of 6 %.( 5 marks)

Answer 1

Interest earned per year= $\frac{8}{100} \times 100000 = sh.8000$

Present Value = $present\: value\: factor\times100000$

present value factor = $\frac{1}{(1+\frac{6}{100})^3}$

= 0.8396

PV= $0.8396\times100000=sh. 83960$

Present Value of interest Rates =  0.839619

Total Interest = $0.839619\times8000= 6,717$

Issue Price = $83960+6717$

=sh . 90677