Question

Determine the bond issue proceeds for each of the following bonds payable. All bonds are issued on January 1, 2019.

A. Safron Corporation issued bonds in the amount of $ 120, 000 that will be paid in nine years. Interest of $ 12, 000 is payable annually each December 31 with the first interest payment at the end of the year on December 31, 2019. If the market rate of interest is 8 % , what is the amount of the bond issue proceeds?

B. Master Corporation issued bonds in the amount of $ 450,000 that will be paid in 9 years. Interest of $ 9, 000 is payable semiannually each June 30 and December 31 with the first interest payment at the end of the period on June 30, 2019. If the market rate of interest is 10 %, what is the amount of the bond issue proceeds?

Answer 1

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.

Question A

Solution

	Annual Rate	Applicable rate		Face Value	$ 1,20,000.00
Market Rate	8.00%	8.00%		Term (in years)	9
Coupon Rate	10.00%	10.00%		Total no. of interest payments	9

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$        1,20,000	at	8.00%	Interest rate for	9	term payments
PV of $1	0.50025
PV of	$        1,20,000	=	$       1,20,000	x	0.50025	=	$       60,029.88	A
Interest payable per term	at	10%	on	$1,20,000
Interest payable per term	$     12,000.00
PVAF of 1$	for	8.0%	Interest rate for	9	term payments
PVAF of 1$	6.24689
PV of Interest payments	=	$           12,000.00	x	6.24689	=		$       74,962.65	B
				Bond issue price (A+B)			$   1,34,992.53

Question B

Solution

	Annual Rate	Applicable rate		Face Value	$           4,50,000.00
Market Rate	10.00%	5.00%		Term (in years)	9
Coupon Rate	4.00%	2.00%		Total no. of interest payments	18

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$        4,50,000	at	5.00%	Interest rate for	18	term payments
PV of $1	0.41552
PV of	$        4,50,000	=	$       4,50,000	x	0.41552	=	$   1,86,984.29	A
Interest payable per term	at	2%	on	$   4,50,000
Interest payable per term	$        9,000.00
PVAF of 1$	for	5.0%	Interest rate for	18	term payments
PVAF of 1$	11.68959
PV of Interest payments	=	$              9,000.00	x	11.68959	=		$   1,05,206.28	B
				Bond issue price (A+B)			$   2,92,190.58