Question

Dempsey Railroad Co. is about to issue $290,000 of 6-year bonds paying an 12% interest rate, with interest payable semiannually. The discount rate for such securities is 10%.

Click here to view the factor table.

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

How much can Dempsey expect to receive for the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.)

Dempsey can expect to receive

$

Answer 1

Dempsey can expect to receive

$ 315,704 (or $ 315703)

• 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	$             290,000.00
Term (in years)	6
Total no. of interest payments	12

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	10.0%	5.0%
Coupon Rate	12.0%	6.0%

• Calculation

	Amount	PV factor	Present Values
PV of Face Value of	$                       290,000.00	0.55684	$                     161,483.60
PV of Interest payments of	$                          17,400.00	8.86326	$                     154,220.72
Issue Price of Bonds			$                     315,704.32