Question

Brief Exercise 6-15 Marin Inc. issues $4,200,000 of 7% bonds due in 12 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 12%. Click here to view factor tables What amount will Marin receive when it issues the bonds? (For calculation purposes, use 5 decimal places as displayed in the factor table provided and final answer to 0 decimal places, e.g. 458,581.) Amount received by Marin when bonds were issued $enter a dollar amount rounded to 0 decimal places

Answer 1

Annual interest payment = Par value of bonds x Stated interest rate

= 4,200,000 x 7%

= $294,000

Market interest rate = 12%

Maturity period of bonds = 12 years

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 4,200,000 x Present value factor (12%, 12)

= 4,200,000 x 0.25668

= $1,078,056

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= x Present value annuity factor (12%, 12)

= 294,000 x 6.19437

= $1,821,145

Proceeds from bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

= 1,078,056+1,821,145
= $2,899,201

Kindly comment if you need further assistance. Thanks‼!