Factors That Affect The Bond Issue Price Rivera Inc. is considering the issuance of $500,000 face…

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Factors That Affect The Bond Issue Price

Rivera Inc. is considering the issuance of $500,000 face value, ten-year term bonds. The bonds

will pay 5% interest each December 31. The current market rate is 5%; therefore, the bonds will

be issued at face value.

Required

1. For each of the following situations, indicate whether you believe the company will receive a

premium on the bonds or will issue them at a discount or at face value. Without using numbers,

explain your position.

a. Interest is paid semiannually instead of annually.

b. Assume instead that the market rate of interest is 4%; the nominal rate is still 5%.

2. For each situation in (1), prove your statement by determining the issue price of the bonds

given the changes in (a) and (b).