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 1 year ago

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