Splish Corporation issues $450,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Click here to view factor tables. Compute the issue price of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Issue price of the bonds:
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Issue price of bonds | = | $ 4,23,698 | ||
Workings: | ||||
Cash flow | Period | Amount | P.V Factor @5% | Present Value |
Maturity value | 18 | $ 4,50,000 | 0.41552 | $ 1,86,984 |
Interest (annuity) | 1 to 18 | $ 20,250 | 11.68959 | $ 2,36,714 |
Total proceeds | $ 4,23,698 | |||
Working notes:- | ||||
Interest is payable semiannualy i.e twice a year | ||||
Semiannual coupon rate | = | Coupon rate / 2 | ||
= | 9% / 2 | |||
= | 4.50% | |||
Number of semiannual periods | = | Number of years X 2 | ||
= | 9 years X 2 | |||
= | 18 years | |||
Interest payment | = | $450000 X 4.5% | ||
= | $ 20,250 | |||
Semiannual market interest rate | = | 10% / 2 | ||
= | 5.0% |
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