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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