Question

Brief Exercise A-14 Dempsey Railroad Co. is about to issue $334,000 of 9-year bonds paying an 11% interest rate, with interest payable semiannually. The discount rate for such securities is 12%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) In this case, how much can Dempsey expect to receive from the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.) Dempsey can expect to receive $

Answer 1

Answer:-Dempsey can expect to receive =$315917

Explanation:-

Calculation of present value of bond at issuance=

                B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 5.5% (= 11%/ 2), the market interest rate is 6% (= 12%/ 2) and number of time periods are 18 (= 2*9). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =5.5%*$334000*{1-(1+6%)^-18/6%} +$334000/(1+6%)¹⁸

                         =($18370*10.82760)+ ($334000*0.35034)

                        = $198903+$117014 = $315917