Question

In: Accounting

Company X is issuing bonds. They plan to issue 10,000, $1000 par, 6% bonds that pay...

Company X is issuing bonds. They plan to issue 10,000, $1000 par, 6% bonds that pay semi-annual for 5 years. What are the proceeds from this bond sale if the market rate is 7%?

Expert Solution

Par value of bonds = Number of bonds x Par value per bond
= 10,000 x 1,000
= $10,000,000

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 10,000,000 x 6% x 6/12

= $300,000

Market interest rate = 7%

Semi annual Market interest rate = 3.5%

Maturity period of bonds = 5 years or 10 semi annual periods

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 10,000,000 x Present value factor (3.5%, 10)

= 10,000,000 x 0.70892

= $7,089,200

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 300,000 x Present value annuity factor (4%, 30)

= 300,000 x 8.31661

= $2,494,983

Proceeds from bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

=7,089,200+2,494,983

= $9,584,183

ekkarill92 answered 2 years ago

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