Question

In: Accounting

Marwick Corporation issues 8%, 5 year bonds with a par value of $1,150,000 and semiannual interest...

Marwick Corporation issues 8%, 5 year bonds with a par value of $1,150,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors:

n= i= Present Value of an Annuity Present value of $1
5 8 % 3.9927 0.6806
10 4 % 8.1109 0.6756
5 6 % 4.2124 0.7473
10 3 % 8.5302 0.7441

Multiple Choice

$1,248,104

$757,611

$1,150,000

$939,244

$1,542,389

Solutions

Expert Solution

Correct Answer --- $1,248,104

Calculation

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

$    1,150,000.00

Market Rate

6.00%

3.00%

Term (in years)

5

Coupon Rate

8.00%

4.00%

Total no. of interest payments

10

Market interest rate is lower than coupon rate of bond hence bond will be issued at premium.

Calculation of Issue price of Bond

Bond Face Value

Market Interest rate (applicable for period/term)

PV of

$ 1,150,000.00

at

3.0%

Interest rate for

10

term payments

PV of $1

0.7441

PV of

$ 1,150,000.00

=

$ 1,150,000.00

x

0.7441

=

$ 855,715

A

Interest payable per term

at

4.0%

on

$ 1,150,000.00

Interest payable per term

$       46,000.00

PVAF of 1$

for

3.0%

Interest rate for

10

term payments

PVAF of 1$

8.5302

PV of Interest payments

=

$             46,000.00

x

8.5302

=

$ 392,389

B

Bond Value (A+B)

$1,248,104

ekkarill92 answered 1 year ago
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