Gleason Enterprises issued 12%, 7-year, $2,630,000 par value bonds that pay interest semiannually on October 1...

Gleason Enterprises issued 12%, 7-year, $2,630,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2020, and are issued on that date. The discount rate of interest for such bonds on April 1, 2020, is 14%.

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(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What cash proceeds did Gleason receive from issuance of the bonds? (Round answer to 0 decimal places, e.g. 125.)

Cash proceeds from issuance of the bonds

Solutions

Expert Solution

Cash proceeds from issuance of the bond = $ 2,400,002 (or $ 2,400,000 or $ 2,400,001 depending upon rounding off)
Concept

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

Data

Face Value	$ 2,630,000.00
Term (in years)	7
Total no. of interest payments	14

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	14.0%	7.0%
Coupon Rate	12.0%	6.0%

Answer calculation

	Amount	PV factor	Present Values
PV of Face Value of	$ 2,630,000.00	0.38782	$ 1,019,966.60
PV of Interest payments of	$ 157,800.00	8.74547	$ 1,380,035.17
Issue Price of Bonds			$ 2,400,001.77

ekkarill92 answered 8 months ago

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