Question

Outdoor Adventure Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. i (Click the icon to viewing the financing information.) Read the requirements. Requirement 1. Will the bonds issue at face value, a premium, or a discount? A More Info Outdoor Adventure's bonds will be issued at because the cash proceeds are less than the face value of the bonds. the cash proceeds are more than the face value of the bonds. the cash proceeds equal the face value of the bonds. the market rate of interest equals the stated rate. Outdoor Adventure Company plans to raise the capital by issuing $1,200,000 of 7%, five-year bonds on January 2, 2020. The bonds pay interest semiannually on June 30 and December 31. The company receives $1,198,600 when the bonds are issued. The company also issues a mortgage payable for $825,000 on January 2, 2020. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $55,000 plus interest for fifteen years, payable on December 31. The mortgage interest rate is 7%. Print Done

Answer 1

Solution:

Face value of the bonds = $1,200,000

Cash proceeds received = $1,198,600

Discount = Face value - cash proceeds = $1,200,000 - $1,198,600 = $1,400

Outdoor adventure's bonds will be issued at "discount" because the "cash proceeds are less than the face value of bonds".