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Auerbach Inc. issued 5% bonds on October 1, 2018. The bonds have a maturity date of...

Auerbach Inc. issued 5% bonds on October 1, 2018. The bonds have a maturity date of September 30, 2028 and a face value of $2,000,000. The bonds pay interest each March 31 and September 30, starting on 3/31/19 and finishing at maturity. The effective interest rate established by the market is 6% annually at the date of issue. How much did Auerbach receive from the bond issue on 10/1/2018?

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Expert Solution

Coupon Rate per period 2.5%
Period 20
Effective/Market rate per period 3.0%
Bond amount $2,000,000
Period Cashflows Present value Calculation
1 $50,000 $48,544 (50000/(1+0.03)^1)
2 $50,000 $47,130 (50000/(1+0.03)^2)
3 $50,000 $45,757 (50000/(1+0.03)^3)
4 $50,000 $44,424 (50000/(1+0.03)^4)
5 $50,000 $43,130 (50000/(1+0.03)^5)
6 $50,000 $41,874 (50000/(1+0.03)^6)
7 $50,000 $40,655 (50000/(1+0.03)^7)
8 $50,000 $39,470 (50000/(1+0.03)^8)
9 $50,000 $38,321 (50000/(1+0.03)^9)
10 $50,000 $37,205 (50000/(1+0.03)^10)
11 $50,000 $36,121 (50000/(1+0.03)^11)
12 $50,000 $35,069 (50000/(1+0.03)^12)
13 $50,000 $34,048 (50000/(1+0.03)^13)
14 $50,000 $33,056 (50000/(1+0.03)^14)
15 $50,000 $32,093 (50000/(1+0.03)^15)
16 $50,000 $31,158 (50000/(1+0.03)^16)
17 $50,000 $30,251 (50000/(1+0.03)^17)
18 $50,000 $29,370 (50000/(1+0.03)^18)
19 $50,000 $28,514 (50000/(1+0.03)^19)
20 $2,050,000 $1,135,035 (2050000/(1+0.03)^20)
$1,851,225
Received from Bond issue $1,851,225

ekkarill92 answered 2 years ago
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