Question

Monty Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,258,500 of 8% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 6%.

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As the controller of the company, determine the selling price of the bonds. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Selling price of the bonds

Answer 1

Selling price of Bond = $3,897,191

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 3,258,500
Market Rate	6%	3.00%		Term (in years)	15
Coupon Rate	8%	4.00%		Total no. of interest payments	30

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$         3,258,500	at	3.00%	Interest rate for	30	term payments
PV of $1	0.41199
PV of	$         3,258,500	=	$ 3,258,500	x	0.41199	=	$ 1,342,469	A
Interest payable per term	at	4.00%	on	$ 3,258,500
Interest payable per term	$ 130,340
PVAF of 1$	for	3.00%	Interest rate for	30	term payments
PVAF of 1$	19.60044
PV of Interest payments	=	$ 130,340	x	19.60044	=		$ 2,554,721	B
				Bond Value (A+B)			$                 3,897,191