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   Use the following information to answer questions 7.     On January 1, 2020, Beck Co....

   Use the following information to answer questions 7.

    On January 1, 2020, Beck Co. issued (sold) ten-year bonds with a face amount of $3,000,000 and a stated

     interest rate of 10%. Interest is payable semi-annually on January1 and July 1st of each year.

     The bonds were priced to yield 8% (market interest rate).

            Present value factors are as follows:

                                                                                                                    At 4%                 At 8%          At 10%

Present value of $1 for 10 periods 0.6756 0.4630 0.3860

Present value of $1 for 20 periods 0.4564                 0.2145           0.1486

Present value of an ordinary annuity of $1 for 10 periods 8.1109                 6.7100          6.1450

Present value of an ordinary annuity of $1 for 20 periods 13.590                  9.8181          8.5136

     7- The total issue price of the bonds was                     

a.   $3,000,000.

b.   $3,402,,000.

c.   $2,760,000.

d.   $3,407,700.

e.   None of the above        

Solutions

Expert Solution

Correct answer------------(d) $3,407,700

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 $ 3,000,000
Market Rate 8.00% 4.00% Term (in years) 10
Coupon Rate 10.00% 5.00% Total no. of interest payments 20

..

Calculation of Issue price of Bond
Bond Face Value Market Interest rate (applicable for period/term)
PV of $ 3,000,000 at 4.00% Interest rate for 20 term payments
PV of $1 0.45639
PV of $ 3,000,000 = $ 3,000,000 x 0.45640 = $ 1,369,200 A
Interest payable per term at 5.00% on $ 3,000,000
Interest payable per term $ 150,000
PVAF of 1$ for 4.00% Interest rate for 20 term payments
PVAF of 1$ 13.59033
PV of Interest payments = $ 150,000 x 13.59000 = $ 2,038,500 B
Bond Value (A+B) $ 3,407,700

ekkarill92 answered 1 year ago
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