Question

On January 2, 2007, Yenn Corporation wishes to issue $2,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Compute the amount that Yenn will realize from the sale (issuance) of the bonds.

Please show plug-ins for solving with a financial calculator.

Answer 1

Calculation of the amount that Yenn will realize from the sale (issuance) of the bonds.
Bond issue price = Present value of future coupon payments + Present value of bond maturity amount i.e.par value
Step 1 - Calculation of Present value of future coupon payments
We can use the present value of annuity formula to calculate this value.
Present Value of annuity = P x {[1 - (1+r)^-n]/r}
Present Value of annuity = Present value of future coupon payments = ?
P = Coupon payment per year = Bond par value x Coupon rate = $20,00,000 x 8% = $1,60,000
r = current yield rate = 10%
n = number of years = 10
Present Value of annuity = 160000 x {[1 - (1+0.10)^-10]/0.10}
Present Value of annuity = 160000 x 6.144567
Present Value of annuity = 983130.74
Present value of future coupon payments = $9,83,130.74
Step 2 - Calculation of Present value of bond maturity amount i.e.par value
Present value of bond maturity amount i.e.par value = Par value of bond x Present value factor of 10th year @ 10%
Present value of bond maturity amount i.e.par value = $20,00,000 x (1+0.10)^-10
Present value of bond maturity amount i.e.par value = $20,00,000 x 0.385543
Present value of bond maturity amount i.e.par value = $7,71,086.58
Bond issue price = $9,83,130.74 + $7,71,086.58
Bond issue price = $17,54,217.32
Yenn will realize from the sale (issuance) of the bonds $17,54,217.