Santa Corporation issued a bond on January 1 of this year with a face value of $1,000. The bond's coupon rate is 4 percent and interest is paid once a year on December 31. The bond matures in three years. The annual market rate of interest was 5 percent at the time the bond was sold. The following amortization schedule pertains to the bond issued: Cash Paid Interest Expense Amortization Balance January 1, Year 1 $973 December 31, Year 1 $40 $49 $9 982 December 31, Year 2 40 49 9 991 December 31, Year 3 40 49 9 1,000 Required: 1. What was the bond's issue price

The price of the bond at issuance is $973.

Explanation:

The selling price of the bond is equal to the present value of all cash flow received from the holding the bonds to maturity, at the issuance time. Thus, these cash flows would be discounted at the annual market rate at the time it is sold which is 5%.

Holding the bond would generate 2 types of cash flows:

+ Annual coupon payment at the end of each year at Face value x coupon rate = 1000 x 4% = $40, for 3 year. Present value of this cash flow = [ 40 / 5%] x [ 1 - (1+5%)^(-3)] = $109

+ Face value payback at the end of 3 year whose present value = 1000 / 1.05^3 = $864

=> Selling price = 109 + 864 =  $973.

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