Question

Metlock Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,432,300 of 8% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 6%.

As the controller of the company, determine the selling price of the bonds.

Answer 1

Determination of the selling price of the bonds:

Present value of the face value	$1,432,179
[$3,432,300 x 0.417265*]
Present value of the interest payments	$2,690,984
[$137,292 x 19.60044**]
Issue price of the bond	$4,123,163

*Present value interest factor for single cash flow at 6% for 15th year is 0.417265 (From present value table)

**Present value annuity factor at 3% for 30 years is 19.60044 (From present value table)

Calculations:

Interest payment = $3,432,300 x 8% x (6 months/12 months)

= $274,584 x (6/2)

=$137,292

.

Table 3 - Present value interest factors for single cash flows. PV = 1/(1+ k)^n) Period (n)/ per cent(k) 1% 0.9901 0.9803 0.9706 0.9610 0.9515 6 0.9420 0.9327 8 0.9235 9 0.9143 10 0.9053 11 0.8963 12 0.8874 13 0.8787 14 0.8700 15 0.8613 16 0.8528 17 0.8444 18 0.8360 19 0.8277 20 0.8195 218114 0.8114 22 0.8034 23 0.7954 24 0.7876 25 0.7798 2% 0.9804 0.9709 0.9612 0.9426 0.9423 0.9151 0.9238 0.8885 0.9057 0.8626 0.8880 0.8375 0.8706 0.8131 0.8535 0.7894 0.8368 0.7664 0.8203 0.7441 0.8043 0.7224 0.7885 0.7014 0.7730 0.6810 0.7579 0.6611 0.7430 0.6419 0.7284 0.6232 0.7142 0.6050 0.7002 0.5874 0.6864 0.5703 0.67300.5537 0.6598 0.5375 0.6468 0.5219 0.6342 0.5067 0.6217 0.4919 0.6095 0.4776 4% 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.6756 0.6496 0.6246 0.6006 0.5775 0.5553 0.5339 0.5134 0.4936 0.4746 0.4564 0.4388 0.4220 0.4057 0.3901 0.3751 5% 6% 7% 0.9524 0.94340.9346 0.9070 0.8900 0.8734 0.8638 0.8396 0.8163 0.8227 0.7921 0.7629 0.7835 0.7473 0.7130 0.7462 0.7050 0.6663 0.7107 0.6651 0.6227 0.6768 0.6274 0.5820 0.6446 0.5919 0.5439 0.6139 0.5584 0.5083 0.5847 0.5268 0.4751 0.5568 0.4970 0.4440 0.5303 0.4688 0.4150 0.505104423 0.3878 0.4810 0.4173 0.3624 0.4581 0.39360.3387 0.4363 0.3714 0.3166 0.4155 0.3503 0.2959 0.3957 0.3305 0.2765 0.3769 0.3118 0.2584 0.3589 0.2942 0.2415 0.3418 0.2775 0.2257 0.3256 0.2618 0.2109 0.3101 0.2470 0.1971 0.2953 0.2330 0.1842 8% 9% 0.9259 0.9174 0.8573 0.8417 0.79380.7722 0.7350 0.7084 0.6806 0.6499 0.6302 0.5963 0.5835 0.5470 0.5403 0.5019 0.5002 0.4604 0.4632 0.4224 0.4289 0.3875 0.3971 0.3555 0.3677 0.3262 0.3405 0.2992 0.3152 0.2745 0.2919 0.2519 0.2703 0.2311 0.2502 0.2120 0.2317 0.1945 0.21450.1784 0.1987 0.1637 0.1839 0.1502 0.1703 0.1378 0.1577 0.1264 0.14600.1160 10% 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665 0.4241 0.3855 0.3505 0.3186 0.2897 0.2633 0.2394 0.2176 0.1978 0.1799 0.1635 0.1486 0.1351 0.1228 0.1117 0.1015 0.0923 11% 12% 13% 0.9009 0.8929 0.8850 0.8116 0.7972 0.7831 0.7312 0.7118 0.6931 0.6587 0.6355 0.6133 0.5935 0.5674 0.5428 0.5346 0.5066 0.4803 0.4817 0.4523 0.4251 0.4339 0.4039 0.3762 0.39090.3606 0.3329 0.3522 0.32200.2946 0.3173 0.2875 0.2607 0.2858 0.2567 0.2307 0.2575 0.2292 0.2042 0.2320 0.20460.1807 0.2090 0.1827 0.1599 0.1883 0.1631 0.1415 0.1696 0.1456 0.1252 0.1528 0.13000.1108 0.1377 0.1161 0.0981 0.1240 0.1037 0.0868 0.1117 0.0926 0.0768 0.1007 0.0826 0.0680 0.0907 0.0738 0.0601 0.0817 0.0659 0.0532 0.0736 0.0588 0.0471 14% 15% 16% 20% 0.8772 0.8696 0.8621 0.8333 0.7695 0.7561 0.7432 0.6944 0.6750 0.6575 0.6407 0.5787 0.5921 0.57180.5523 0.4823 0.5194 0.4972 0.4761 0.4019 0.4556 0.4323 0.4104 0.3349 0.3996 0.3759 0.3538 0.2791 0.35060.3269 0.3050 0.2326 0.3075 0.2843 0.26300.1938 0.2697 0.2472 0.2267 0.1615 0.2366 0.2149 0.1954 0.1346 0.2076 0.1869 0.1685 0.1122 0.1821 0.1625 0.1452 0.0935 0.1597 0.1413 0.1252 0.0779 0.1401 0.1229 0.1079 0.0649 0.1229 0.1069 0.0930 0.0541 0.1078 0.0929 0.0802 0.0451 0.0946 0.0808 0.0691 0.0376 0.0829 0.0703 0.0596 0.0313 0.0728 0.0611 0.0514 0.0261 0.0638 0.0531 0.0443 0.0217 0.0560 0.0462 0.0382 0.0181 0.0491 0.0402 0.0329 0.0151 0.0431 0.0349 0.0284 0.0126 0.0378 0.0304 0.0245 0.0105