Question

In: Accounting

On January 1, the Company issued $400,000 of 6%, 6-year bonds when the market rate of...

On January 1, the Company issued $400,000 of 6%, 6-year bonds when the market rate of interest was 8%. The bonds pay interest semiannually on June 30 and December 31.   

How much are the proceeds that Ryan will receive from the bond issue date?

Solutions

Expert Solution

Bond Proceeds are the cash received by the Issuing company by issuance of the bonds.

Issue price is calculated based on the market rate of interest.

Cash Proceeds or Issue Price from Issuance of Bonds

Face Value of the bonds = $400,000

Semi-Annual Coupon Interest = Face Value 400,000 * Coupon Rate 6% x Half Yearly ½ = $12,000

Period to maturity (n) = 6 Years x 2 = 12

Semi Annual Market Interest Rate (R) = 8/2 = 4%

Present Value of Bonds (Bond Issue Price) = Semi-Annual Coupon Interest x PVIFA (R, n) + Par Value x PVIF (R, n)

= ($12,000*9.38507) + ($400,000*0.62460)

= $112,620.84 + $249,840

= $362,460.84

Note -- Calculation of Present Value Factor (Rounded to 5 decimal places)

PVIFA (R, n) = Present Value interest factor for ordinary annuity at R% for n periods = (1 – 1/(1+R)n) / R

PVIFA (4%, 12) = (1 – 1/(1+0.04)12) / 0.04 = 9.38507

PVIF (R, n) = Present Value interest factor for ‘n’ period at ‘R’% = 1/(1+R)n

PVIF (4%, 12) = 1/(1+0.04)12 = 0.62460

In case the decimal places rounded to 3 decimal places, the answer will be slightly different

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you


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