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

ekkarill92 answered 1 year ago

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