Coronado Company issues $26000000, 5%, 5-year bonds dated January 1, 2017 on January 1, 2017. The...

Coronado Company issues $26000000, 5%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 4%. What are the proceeds from the bond issue?

Answers given:

$27156209

$26000000

$27167784

$27160279

Expert Solution

Correct answer----$2716778

Working

The calculation i made are little diffrent due to round off but the answer stated above is correct.

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Annual Rate	Applicable rate	Face Value	$ 2,60,00,000.00
Market Rate	4.00%	2.00%	Term (in years)	5
Coupon Rate	5.00%	2.50%	Total no. of interest payments	10

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 2,60,00,000	at	2.00%	Interest rate for	10	term payments
PV of $1	0.82035
PV of	$ 2,60,00,000	=	$ 2,60,00,000	x	0.82035	=	$ 2,13,29,056	A

Interest payable per term	at	3%	on	$ 2,60,00,000
Interest payable per term	$ 6,50,000

PVAF of 1$	for	2.0%	Interest rate for	10	term payments
PVAF of 1$	8.98259
PV of Interest payments	=	$ 6,50,000.00	x	8.98259	=		$ 58,38,680	B

				Bond Value (A+B)			$ 2,71,67,736

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