Question

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

5. Compute the price of $42,309,236 received for the bonds by using the present value tables in Exhibit 5 and Exhibit 7. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers issued $65,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

5. Compute the price of $73,100,469 received for the bonds by using the present value tables Exhibit 5 and Exhibit 7.

Answer 1

• All working forms part of the answer
• Question 1

Price of the bond = $ 42,309,236 calculated by using Present Values tables (that were not provided)

----Present Value table to look for = 11% market rate, semi annual payments = 11%/2 = 5.5%.

---Use 5.5% discount rate table column

----Look out for 5.5% Interest rate present value factor table (PVF $1) for 40^th period = 0.117463142.

>Present value of maturity payment = 46000000 x 0.117463142 = $ 5,403,305.

---Semi Annual Interest payment = 46000000 x 10% x 6/12 = $ 2,300,000

---Look out for 5.5% interest rate present value ANNUITY table (PFA $1) for 40 periods = 16.04612469

>Present value of interest payments = $ 36,906,087.

>Price of Bonds = Present value of Maturity + Present Value of Interest payments = 5403305 + 36906087 = $ 42,309,392

• Question 2

Price of the bond = $ 73,100,469 calculated by using Present Values tables (that were not provided)

----Present Value table to look for = 10% market rate, semi annual payments = 10%/2 = 5%.

---Use 5% discount rate table column

----Look out for 5% Interest rate present value factor table (PVF $1) for 20^th period = 0.376889483

>Present value of maturity payment = 65000000 x 0.376889483 = $24,497,816

---Semi Annual Interest payment = 65000000 x 12% x 6/12 = $ 3,900,000

---Look out for 5% interest rate present value ANNUITY table (PFA $1) for 20 periods = 12.46221034

>Present value of interest payments = 3900000 x 12.46221034 =   $48,602,620

>Price of Bonds = Present value of Maturity + Present Value of Interest payments = 24497816 + 48602620 = $ 73,100,436