Question

Bushman, Inc., issues $400,000 of bonds to private investors. The bonds are due in 8 years,...

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?

Homework Answers

Answer #1

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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