Bushman, Inc., issues $400,000 of bonds to private investors. The bonds are due in 8 years, and have an 8% coupon rate, and interest is paid semi-annually. The bonds are sold to yield 10%. a. What proceeds does Bushman, Inc. receive from investors?
b. What periodic interest payment does Bushman make to investors?
Answer to Part
a.:
Face Value = $400,000
Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $400,000
Semiannual Coupon = $16,000
Time to Maturity = 8 years
Semiannual Period to Maturity = 16
Annual Market Rate = 10%
Semiannual Market Rate = 5%
Issue Price of Bond = $16,000 * PVIFA(5%, 16) + $400,000 *
PVIF(5%, 16)
Issue Price of Bond = $16,000 * 10.8376 + $400,000 * 0.4581
Issue Price of Bond = $356,641.60
The Bushman, Inc receive $356,641.60 from the issuance of bonds to investors.
Answer to Part
b.:
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $400,000
Semiannual Coupon = $16,000
The Bushman has to make a periodic interest payment of $16,000.
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