Question

Kingbird Inc. issues $2,085,900 of 9% bonds due in 12 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 10%. Click here to view factor tables What amount will Kingbird receive when it issues the bonds? (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 458,581.)

Amount received by Kingbird when bonds were issued?

Answer 1

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]

--Working and Answer

	Annual Rate
Market Rate	10.0%
Coupon Rate	9.0%

-

	Amount	PV factor	Present Values
PV of Face Value of	$                    2,085,900.00	0.31863 [PV $1 at 12th period]	$                     664,630.32
PV of Interest payments of	$                       187,731.00[ 2085900 x 9%]	6.81370 [PVA $1 at 12th period]	$                 1,279,142.71
Issue Price of Bonds			$                 1,943,773.03

--Correct Answer
Amount received when Bonds are issued = $ 1,943,773