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Jimenez Enterprises issued 9%, 8-year, $2,689,000 par value bonds that pay interest semiannually on October 1 and April 1.

Jimenez Enterprises issued 9%, 8-year, $2,689,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2014, and are issued on that date. The discount rate of interest for such bonds on April 1, 2014, is 10%.
What cash proceeds did Jimenez receive from the issuance of the bonds?

Expert Solution

Issue price of bonds = Present value of Face amount + Present value of cash interest payment

Present value of face amount = Face amount / (1+r)nxt

Present value of cash interest payment = Semi annual cash interest X [1 - {1/(1 + r)nxt }] / r

Where, Face amount = $ 2,689,000

Semi annual cash interest payment = $ 2,689,000 X 9% X 6/12 = $ 121,005

r = semi annual market rate of interest = 10% / 2 = 5% or 0.05

n = Tenure of bonds in years = 8

t = times of compounding in a year = Semi annual = 2

Present value of face amount = $ 2,689,000 / (1+0.05)8x2

= $ 2,689,000 / (1.05)16

= $ 2,689,000 / 2.1828746

= $ 1,231,862

Present value of cash interest payment = $ 121,005 X [ 1 - {1 /(1 + 0.05)8x2 }]/ 0.05

= $ 121,005 X [1 - {1/(1.05)16 }] / 0.05

= $ 121,005 X [1 - 1/2.1828746] / 0.05

= $ 121,005 X [1.1828746/ 2.1828746] / 0.05

= $ 121,005 X 10.8377696

= $ 1,311,424

Issue price of bonds (Cash proceeds on issue of bonds) = $ 1,231,862 + $ 1,311,424 = $ 2,543,286.

Junaid answered 1 year ago

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