Question

Dempsey Railroad Co. is about to issue $290,000 of 8-year bonds paying an 11% interest rate, with interest payable semiannually. The discount rate for such securities is 12%. In this case, how much can Dempsey expect to receive from the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.)

Answer 1

Issue value of bond		290000
Time period =		8	Years
Interest Rate		11%
Discount Rate		12%
How much Can dempsey Expect to receive from sale of bonds.
Solution :
Total present value = Present value of par amount in 8 years + PV of the coupns (iNterest)
Present value of coupons :
Interest amount = 290000*11%/2				Since it is paid semiannual
$       15,950.00
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
15950[(1 - 1/1.06^16)) / 0.06)]
15950*10.1059
$     161,189.11
PV of par = Par / (1+i)^n
290000/(1+0.12)^8
290000*0.403883
$ 117,126.07
Total PV = 117126+161189			$ 278,315.00