Question
In: Accounting
1. Reed Corp. sells $700,000 of bonds to private investors. The bonds are due in five...
1. Reed Corp. sells $700,000 of bonds to private investors. The bonds are due in five years, have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 6%. What proceeds does Reed receive from the investors?
2. Sykora Corp. sells $450,000 of bonds to private investors. The bonds are due in 5 years, have a 6% coupon rate and interest is paid semiannually. Sykora received $490,222 for the bonds at issuance. The effective rate on these bonds is:
3. Heller Company issues $950,000 of 10% bonds that pay interest semiannually and mature in 10 years. What is the bonds’ issue price assuming that the bonds’ market interest rate is 14% per year?
Solutions
Expert Solution
| Req 1. | ||||||
| Maturity value of bonds | 700000 | |||||
| Cash Semi annual interest (700000*4%*6/12) | 14000 | |||||
| Annuity PVF at 3% for 10 periods | 8.5302 | |||||
| PVF at 3% for 10th perriod | 0.74409 | |||||
| Present value of Maturity value | 520863 | |||||
| Present value of interest | 119422.8 | |||||
| issue price | 640285.8 | |||||
| Req 2. | ||||||
| Maturity value of bonds | 450000 | |||||
| Cash Semi annual interest (450000*6%*6/12) | 13500 | |||||
| Annuity PVF at 2% for 10 periods | 8.9825 | |||||
| PVF at 2% for 10th perriod | 0.8203 | |||||
| Present value of Maturity value | 369135 | |||||
| Present value of interest | 121263.8 | |||||
| issue price | 490398.8 | |||||
| Hence, Market yield is 4% approx | ||||||
| Req 3. | ||||||
| Maturity value of bonds | 950000 | |||||
| Cash Semi annual interest (950000*10%*6/12) | 47500 | |||||
| Annuity PVF at 7% for 20 periods | 10.59401 | |||||
| PVF at 7% for 20th perriod | 0.25842 | |||||
| Present value of Maturity value | 245499 | |||||
| Present value of interest | 503215.5 | |||||
| issue price | 748714.5 | |||||
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