Question

Dempsey Railroad Co. is about to issue $304,000 of 6-year bonds paying an 9% interest rate, with interest payable semiannually. The discount rate for such securities is 10%.

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

In this case, how much can Dempsey expect to receive from the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.)

Dempsey can expect to receive

$

Answer 1

Answer

• Dempsey can expect to receive = $ 290,529

• 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]

• Data

Face Value	$             304,000.00
Term (in years)	6
Total no. of interest payments	12

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	10.0%	5.0%
Coupon Rate	9.0%	4.5%

• Answer calculation

	Amount	PV factor	Present Values
PV of Face Value of	$                       304,000.00	0.55684	$                     169,279.36
PV of Interest payments of	$                          13,680.00	8.86325 (or 8.86326)	$                     121,249.26 (or $ 121,249.40)
Issue Price of Bonds			$                     290,528.62