Question

# Autumn Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested...

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:

 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