Question
In: Accounting
Coronado Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested...
Coronado Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,492,700 of 10% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 8%.
As the controller of the company, determine the selling price of
the bonds. (Round factor values to 5 decimal places,
e.g. 1.25124 and final answer to 0 decimal places, e.g.
458,581.)
| Selling price of the bonds |
$ |
Solutions
Expert Solution
Selling Price of the Bond
· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
· Here, the calculation of the Bond Price using financial calculator is as follows
|
Variables |
Financial Calculator Keys |
Figure |
|
Par Value/Face Value of the Bond [$3,492,700] |
FV |
3,492,700 |
|
Coupon Amount [$3,492,700 x 10.00% x ½] |
PMT |
174,635 |
|
Market Interest Rate or Yield to maturity on the Bond [8.00% x ½] |
1/Y |
4 |
|
Maturity Period/Time to Maturity [(March 1, 2035 - March 1, 2020) x 2] |
N |
30 |
|
Bond Price/Current market price of the Bond |
PV |
? |
Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $4,096,663.
Therefore, the Selling Price of the Bond will be $4,096,663
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