Question

In: Accounting

On January 1, 2020, Bonita Industries issued eight-year bonds with a face value of $5750000 and...

On January 1, 2020, Bonita Industries issued eight-year bonds with a face value of $5750000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

Present value of 1 for 8 periods at 10%          0.467
Present value of 1 for 8 periods at 12%          0.404
Present value of 1 for 16 periods at 5%        0.458
Present value of 1 for 16 periods at 6%        0.394
Present value of annuity for 8 periods at 10%            5.335
Present value of annuity for 8 periods at 12%            4.968
Present value of annuity for 16 periods at 5%          10.838
Present value of annuity for 16 periods at 6%          10.106


The issue price of the bonds is

Solutions

Expert Solution

Answer--------------The issue price of the bonds is $5,170,975

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 $ 5,750,000
Market Rate 12.00% 6.00% Term (in years) 8
Coupon Rate 10.00% 5.00% Total no. of interest payments 16

.

Calculation of Issue price of Bond
Bond Face Value Market Interest rate (applicable for period/term)
PV of $         5,750,000 at 6.00% Interest rate for 16 term payments
PV of $1 0.39365
PV of $         5,750,000 = $ 5,750,000 x 0.394 = $ 2,265,500 A
Interest payable per term at 5.00% on $ 5,750,000
Interest payable per term $ 287,500
PVAF of 1$ for 6.00% Interest rate for 16 term payments
PVAF of 1$ 10.10590
PV of Interest payments = $ 287,500 x 10.106 = $ 2,905,475 B
Bond Value (A+B) $                 5,170,975

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