Question

On January 1, 2017, Bramble Corp. issued eight-year bonds with a face value of $6120000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%.

Table values are:

Present value of 1 for 8 periods at 10% 0.467

Present value of 1 for 8 periods at 12% 0.404

Present value of 1 for 16 periods at 5% 0.458

Present value of 1 for 16 periods at 6% 0.394

Present value of annuity for 8 periods at 10% 5.335

Present value of annuity for 8 periods at 12% 4.968

Present value of annuity for 16 periods at 5% 10.838

Present value of annuity for 16 periods at 6% 10.106

The issue price of the bonds is: a) $6123060 b) $5503716 c) $5512896 d) $5564916

Answer 1

Answers

• Concept

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	12.0%	6.0%
Coupon Rate	10.0%	5.0%

Face Value	$         6,120,000.00
Term (in years)	8
Total no. of interest payments	16

• Calculation

	Amount	PV factor	Present Values
PV of Face Value of	$                    6,120,000.00	0.394	$                 2,411,280.00
PV of Interest payments of	$                       306,000.00	10.106	$                 3,092,436.00
Issue Price of Bonds			$                 5,503,716.00

• Correct Answer = Option ‘B’ $ 5,503,716