Question

Bond Issue

On January 1, Canglon, Inc., issues 10%, 5-year bonds with a face value of $150,000 when the effective rate is 12%. Interest is to be paid semiannually.

Prepare calculations to prove that the selling price of the bonds is $138,959.90. Click here to access the tables to use with this exercise. Round your answers to two decimal places, if necessary.

Present value of principal:	$______________________________________________________________
Present value of interest:	______________________________________________________________
Selling price	$_________________________________________________________--

Answer 1

Ans:

Face Value : $150,000

Interest rate : 10%

Coupon rate : 10%/ 2 = 5%

Coupon Amount : $150,000 * 5% = $7,500

Life of bond : 5 years

Coupon Period : 5 Years * 2 = 10 Period (Semi annually)

Market Rate : 12%

Effective Market rate : 6%

PV Factor @6% for 10 years : 1/(1.06)^10 = 0.55839

Annuity Factor @6% for 10 Years : 1/(1.06)^1 + 1/(1.06)^2 + 1/(1.06)^3 +.................. 1/(1.06)^10 : 7.36009

1.

PV of Principal : $150,000 * 0.558394 = $83,759.20

2.

PV of Interest : $7,500 * 7.36009 = $55,200.70

3.

Selling Price : $83,759.20 + $55,200.70 = $138,959.90

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