Question

In: Accounting

Blossom Inc. issues $2,011,300 of 10% bonds due in 12 years with interest payable at year-end....

Blossom Inc. issues $2,011,300 of 10% bonds due in 12 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 11%.

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What amount will Blossom receive when it issues the bonds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)

Amount received by Blossom when bonds were issued $

Solutions

Expert Solution

Solution

Amount received by Blossom when bonds were issued = $1,880,718

Working

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 $ 2,011,300
Market Rate 11.00% 11.00% Term (in years) 12
Coupon Rate 10.00% 10.00% Total no. of interest payments 12

.

Calculation of Issue price of Bond
Bond Face Value Market Interest rate (applicable for period/term)
PV of $         2,011,300 at 11.00% Interest rate for 12 term payments
PV of $1 0.28584
PV of $         2,011,300 = $ 2,011,300 x 0.28584 = $ 574,910 A
Interest payable per term at 10.00% on $ 2,011,300
Interest payable per term $ 201,130
PVAF of 1$ for 11.00% Interest rate for 12 term payments
PVAF of 1$ 6.49236
PV of Interest payments = $ 201,130 x 6.49236 = $ 1,305,808 B
Bond Value (A+B) $ 1,880,718

ekkarill92 answered 2 years ago
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