ration plans to issue a 9%, 10-year, P5,000,000 face value bonds. It will incur P500,000 as underwriting fee. What is the cost of the bond based on the following methods? 1. Yield-to-maturity formula 2. Trial and error metho

ration plans to issue a 9%, 10-year, P5,000,000 face value bonds. It will incur P500,000 as underwriting fee. What is the cost of the bond based on the following methods? 1. Yield-to-maturity formula 2. Trial and error metho

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter10: Long-term Liabilities

Section: Chapter Questions

Problem 10.3E: Issue Price The following terms relate to independent bond issues: 500 bonds; $1,000 face value; 8%...

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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

Problem 3: Straight Bonds

ABC Corporation plans to issue a 9%, 10-year, P5,000,000 face value bonds. It will incur P500,000 as underwriting fee. What is the cost of the bond based on the following methods?
1. Yield-to-maturity formula

2. Trial and error method (closest percent, 3 decimal places)

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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