Rivera Inc. is considering the issuance of $500,000 face value, ten-year term bonds. The bonds will pay 10% interest each December 31. The current market rate is 10%; 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 interest is paid annually but that the market rate of interest is 8%; the nominal rate is still 10%.
2. For each situation in part (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b).