Question

Waterway Railroad Co. is about to issue $460,000 of 6-year bonds paying an 7% interest rate, with interest payable semiannually. The discount rate for such securities is 8%.

Click below to view the factor tables.
Table 1. Future Value of 1
Table 2. Future Value of an Annuity of 1
Table 3. Present Value of 1
Table 4. Present Value of an Annuity of 1

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

In this case, how much can Waterway expect to receive from the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.)

Waterway can expect to receive

$

Answer 1

Correct Answer:

Waterways Can expect to receive

$          4,38,416

Working:

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                    4,60,000	at	4.00%	Interest rate for	12	term payments
PV of $1	0.62460
PV of	$                    4,60,000	=	$                4,60,000	x	0.62460	=	$                2,87,316.00	A
Interest payable per term	at	3.5%	on	$                          4,60,000
Interest payable per term	$                       16,100
PVAF of 1$	for	4.0%	Interest rate for	12	term payments
PVAF of 1$	$                     9.38507
PV of Interest payments	=	$        16,100.00	x	9.38507	=		$                1,51,099.63	B
				Bond Value (A+B)			$                      4,38,416

End of Answer.

Thanks