Question

the answer is supposed to be b) could someone explain me why. thanks!

Status Check #3 On April 1, 2018, a company issued 5-year, 9% bonds totaling $7,000,000 when the market interest rate was 9%. Interest is paid semi-annually on June 30 and December 31. Which of the following represents the amount of cash the company will receive on April 1, 2018, when the bonds are issued? a)$7,000,000 (par value (b)$7,157,500 To co x 9% x Š = $315000 c)$7,315,000 315000 32 =$157500 d) $7,630,000 Apal - Apr 30 2/26/2020

Answer 1

Answer -

Step - (1) - Information Given -

On April 1, 2018, a company issued 9%, 5-year, $7000000 par value bonds that pay interest semiannually on June 30 and December 31.

Market interest rate (this is discount rate of interest) = 9%.

.

Step - (2) - Calculation of Cash Proceeds from the Issuance of Bonds on April 1, 2018 -

	Particulars	Formula used	Explanation	Amount($)
I.	Present Value of Bonds Interest Payments	p [1 - (1+r)-n / r] p = Bonds semiannual interest payments = [($7000000*9%)*6/12] = $315000. r = Adjusted discount rate of interest = (9% / 2) = 0.045 n = Number of period = (5 years * 2) = 10 periods.	$315000 [1 - (1+0.045)-10 / 0.045]	2492506
II.	Present Value of Face Value of Bond	FV / (1 + r)n FV = Face Value of bond = $7000000. r = Adjusted discount rate of interest = (9% / 2) = 0.045 n = Number of period = (5 years * 2) = 10 periods.	$7000000 / (1+0.045)10	4507494
Cash Proceeds from the Issuance of Bonds on April 1, 2018			I + II	7000000

Hence, Option - (a) is Correct.