Question

Bramble Corp. issues $5120000, 7%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 6%. What are the proceeds from the bond issue?

ff	3.0%	3.5%	6%	7%
Present value of a single sum for 5 periods	0.86261	0.84197	0.74726	0.71299
Present value of a single sum for 10 periods	0.74409	0.70892	0.55839	0.50835
Present value of an annuity for 5 periods	4.57971	4.51505	4.21236	4.10020
Present value of an annuity for 10 periods	8.53020	8.31661	7.36009	7.02358

a) $5336853

b) $5336038

c) $5338353

d) $5120000

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	6.0%	3.0%
Coupon Rate	7.0%	3.5%

Face Value	$         5,120,000.00
Term (in years)	5
Total no. of interest payments	10

• Calculation

	Amount	PV factor	Present Values
PV of Face Value of	$                    5,120,000.00	0.74409	$                 3,809,740.80
PV of Interest payments of	$                       179,200.00	8.530200	$                 1,528,611.84
Issue Price of Bonds			$                 5,338,352.64

• Correct Answer = Option ‘C’ $ 5,338,353