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.
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).