Question

Carla Inc. issues $2,300,000 of 7% bonds due in 12 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 10%. Click here to view factor tables What amount will Carla receive when it issues the bonds? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and final answer to 0 decimal places, e.g. 458,581.) Amount received by Carla when bonds were issued $enter a dollar amount rounded to 0 decimal places

Answer 1

Issue price of bond = present value of principal value on bond + present value of interest on bond

= ($2,300,000 x 0.31863) + ($161,000 x 6.81369)

= $732,849 + $1,097,004.09

= $1,829,853

therefore the issue price of the bond is $1,829,853

where,

(1)

Coupon rate = 7%

interest on bond = $2,300,000 x 7% = $161,000

(2)

Market interest rate = 10%

Time period = 12

Therefore,

PVF(10%, 12) = 0.31863

PVAF(10%, 12) = 6.81369