Question

Bramble Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,066,000 of 12% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 10% decimal places, e.g. 458,581.)

Answer 1

Answer:

Selling price of the bond $3,537,296

Calculations:

Cash paid for Interest = $3,066,000 x 12% x 6/12 = $183,960

Present value of the interest payment	$2,827,916
[$183,960 x 15.37245 Present value annuity factor (5%, 30 years)]
Present value of the face value	$709,380
[$3,066,000 x 0.23137 present value factor (5%, 30 years)]
Selling price of the bond	$3,537,296

5% is the semi-annual interest for market rate of 10%

Bond tenure is 15 years and interest payment is semi-annually.

Therefore present value factor taken at 5% for 30 periods (15 years x 2 interest payments).

Note: Present value factors are taken form 'Present value table'.