Crane 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
$3,205,500 of 10% term corporate bonds on March 1, 2020, due on
March 1, 2035, with interest payable each March 1 and September 1,
with the first interest payment on September 1st, 2020. At the time
of issuance, the market interest rate for similar financial
instruments is 8%.
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As the controller of the company, determine the selling price of
the bonds. (Round factor values to 5 decimal places,
e.g. 1.25124 and final answer to 0 decimal places, e.g.
458,581.)
| Selling price of the bonds |
$enter the Selling price of the bonds in dollars rounded to 0 decimal places |
| Selling price of the bonds | 3759800 |
| Workings: | |||
| Semi-annual interest | 160275 | =3205500*10%*6/12 | |
| Semi-annual interest rate | 4% | ||
| Number of periods | 30 | =15*2 | |
| Amount | PV factor 4% | Present value | |
| Semi-annual interest | 160275 | 17.29203 | 2771480 |
| Principal | 3205500 | 0.30832 | 988320 |
| Total | 3759800 | ||
| PV factor 4% | |||
| Semi-annual interest | 17.29203 | =(1-(1.04)^-30)/0.04 | |
| Principal | 0.30832 | =1/1.04^30 | |
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