On January 1, 2012, Water World issues $25 million of 6% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Water World intends to use the funds to build the world's largest water avalanche and the "tornado"—a giant outdoor vortex in which riders spin in progressively smaller and faster circles until they drop through a small tunnel at the bottom.


If the market rate is 5%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.


If the market rate is 6%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.


If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

I'm liking the idea of those water slides!

But anyway, back to the boring stuff...

The bonds are being issued at 6% interest, so that's your anchor.

This means that if the market % interest rate is the same, then there's no discount or premium involved, but if the market % interest is higher or lower than that, then there is.

So,

* If the market rate is 5% and waterworld is offering 6% then it's a premium.

* If the market rate is 7% and waterworld is offering 6%, then it's a discount.

Now that you know that, you can have a go at calculating the issue price.