In: Accounting
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?
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
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