Sage Hill Inc. issues $7,750,000 of 6% bonds due in 9 years with interest payable at...

Sage Hill Inc. issues $7,750,000 of 6% bonds due in 9 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Sage Hill receive when it issues the bonds?

Expert Solution

Solution :

The amount that Sage Hill will receive when it issues the bonds is

= Present value of Interest payments for Years 1 to 9 + Present value of the Face value or Principal value of the bond

As per the information given in the question

Face value or Principal value of the bond = $ 7,750,000 ;

Interest rate or coupon rate of the bonds = 6 % ;

Thus Annual coupon payment = $ 7,750,000 * 6 % = $ 465,000 ;

The current market rate of interest for bonds of similar risk is 8% ; Thus the present value of Annual coupon payments and the present value of face value of the bonds shall be calculated by discounting them at 8 % .

Thus the amount that Sage Hill will receive when it issues the bonds shall be equal to

= $ 465,000 * PVIFA(8 %,9 ) + $ 7,750,000 * PVF(8%,9)

= ( $ 465,000 * 6.246888 ) + ( $ 7,750,000 * 0.500249 )

= $ 2,904,802.92 + $ 3,876,929.75

= $ 6,781,732.67

Therefore the amount that Sage Hill will receive when it issues the bonds = $ 6,781,732.67

ekkarill92 answered 2 years ago

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