Question
In: Accounting
Young Co. issues $600,000 of 12% bonds dated January 1, 2021. Interest is payable semiannually on...
Young Co. issues $600,000 of 12% bonds dated January 1, 2021. Interest is payable semiannually on June 30 and December 31. The bonds mature in 9 years. The current market rate for similar bonds is 7%.
What is the issue price of the bonds?
#49
Solutions
Expert Solution
Price of bond = $ 797,845
The final answer maybe different for 2-3 digits due to round off in PV factors.
| 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 | $ 600,000 | ||
| Market Rate | 7.00% | 3.50% | Term (in years) | 9 | |
| Coupon Rate | 12.00% | 6.00% | Total no. of interest payments | 18 |
.
| Calculation of Issue price of Bond | ||||||||
| Bond Face Value | Market Interest rate (applicable for period/term) | |||||||
| PV of | $ 600,000 | at | 3.50% | Interest rate for | 18 | term payments | ||
| PV of $1 | 0.53836 | |||||||
| PV of | $ 600,000 | = | $ 600,000 | x | 0.53836 | = | $ 323,017 | A |
| Interest payable per term | at | 6.00% | on | $ 600,000 | ||||
| Interest payable per term | $ 36,000 | |||||||
| PVAF of 1$ | for | 3.50% | Interest rate for | 18 | term payments | |||
| PVAF of 1$ | 13.18968 | |||||||
| PV of Interest payments | = | $ 36,000 | x | 13.18968 | = | $ 474,829 | B | |
| Bond Value (A+B) | $ 797,845 | |||||||
ekkarill92 answered 2 years agoRelated Solutions
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Cash
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