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On January 1, 2011, Bondz, Inc. issued $1,000,000 of 10%, 10-year bonds when the market rate...

On January 1, 2011, Bondz, Inc. issued $1,000,000 of 10%, 10-year bonds when the market rate of interest was 12%. The bonds pay interest QUARTERLY. To calculate the amount of cash that Bondz received, you must use a discount rate of Select one: a. 10% b. 4% c. 12% d. 3%

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Answer #1

· Market annual rate = 12%

· Payment of interest = Quarterly (4 times in a year)

· Discount rate to be used
= 12% x 4/12
= 4%

· Correct Answer = Option ‘B’ 4%

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]

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