A corporation issues for cash $8,000,000 of 8%, 20-year bonds, interest payable semiannually. The amount received...

A corporation issues for cash $8,000,000 of 8%, 20-year bonds, interest payable semiannually. The amount received for the bonds will be

a. present value of 20 annual interest payments of $640,000, plus present value of $8,000,000 to be repaid in 20 years.

b. present value of $8,000,000 to be repaid in 20 years, less present value of 40 semiannual interest payments of $320,000.

c. present value of 20 annual interest payments of $640,000.

d. present value of 40 semiannual interest payments of $320,000, plus the present value of $8,000,000 to be repaid in 20 years

Solutions

Expert Solution

The Correct answer is d. present value of 40 semiannual interest payments of $320,000, plus the present value of $8,000,000 to be repaid in 20 years

Explanation

It is given in the question that Interest is Payable Semiannually. It means interest is paid 2 times in a year. So the total number of times interest to be paid in 20 years = 20 * 2 = 40

Semiannual Coupon Interest = Par Value $8,000,000*8%*1/2 = $320,000

Hence, we need to calculate the present value of 40 semiannual interest payments of $320,000 = $320,000 x PVIFA (4%, 40) = 320,000 x 19.79277 = $6,333,686

Plus

Present Value of present value of $8,000,000 to be repaid in 20 years = $8,000,000 x PVIF (4%, 40) = $1,666,312

The amount received on the bonds will be = $6,333,686 + $1,666,312 = $7,999,998 or rounded $8,000,000

Hence, the correct option is d. present value of 40 semiannual interest payments of $320,000, plus the present value of $8,000,000 to be repaid in 20 years

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ekkarill92 answered 10 months ago

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