Question

Autumn Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $1,000,000 of 6% term corporate bonds on March 1, 2018, due on March 1, 2028, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 8%. As the controller of the company, the selling price of the bonds would be:

Answer 1

	Interest payments per half year =($1,000,000*6%*6/12)	30000
	No of times interest paid till maturity (in 10 Years)	20 times
	Market rate = 4% (Per half year)
	Present value of Interest payments over the 10 years at 4%:
	Annuity factor for 20 years at 4% (A)	13.59033
	Interest payments per half year =($1,000,000*6%*6/12) (B)	$30,000
	Present value (C=A*B)	$407,710
	Present value of maturity value after 10 years:
	P.v factor at 4% for 20 periods (D)	0.45639
	maturity amount (E)	$1,000,000
	Present value (F=D*E)	$456,390
	Present value (Selling price of bond) (C+F=$407,710+$465,390)	$864,100
Ans	Selling price of the bond = $864,100