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On January 1, 2019, Drennen Inc. issued $2.6 million face amount of 9-year, 14% stated rate bonds when market interest rates were 12%. The bonds pay semiannual interest each June 30 and December 31 and mature on December 31, 2027. Table 6-4, Table 6-5 (Use appropriate factor from the table provided.)

Required:
a. Calculate the proceeds (issue price) of Drennen Inc.'s bonds on January 1, 2019, assuming that the bonds were sold to provide a market rate of return to the investor. (Round PV factor to 4 decimal places.)

Proceeds: ________

Answer 1

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 2,600,000 x 14% x 6/12

= $182,000

Market interest rate = 12%

Semi annual Market interest rate = 6%

Maturity period of bonds = 9 years or 18 semi annual periods

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 2,600,000 x Present value factor (6%, 18)

= 2,600,000 x 0.3503

= $910,780

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 182,000 x Present value annuity factor (6%, 18)

= 182,000 x 10.0591

= $1,830,756

Proceeds from bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

= 910,780 + 1,830,756

= $2,741,536