Question

Stech Co. is issuing $9 million 12% bonds in a private placement on July 1, 2020....

Stech Co. is issuing $9 million 12% bonds in a private placement on July 1, 2020. Each $1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%. What is the expected selling price of the bonds? solve using the calculator method (PV= FV= N=) and show ur work. answer is supposed to be 11446288

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Answer #1

Answer :-

Selling Price of The Bond = $11,008,495

..

Explanations :-

Bond Valuation
Bond face Value $90,00,000
Bond Interest rate 9%
Market Interest rate 8%
Bond Tenture in Years 10
Interest Payment Semi-Annually

Stetch Co paid interest semi-annually, So The Intrest payment will be Devided with 2 And Number of payment will be multiplied with 2

Bond Interest rate = 9% / 2 = 4.50%

Bond Tenture perids = 10 × 2 = 20

W can find the present Value and Present Value of Annuity in present value Table,

Present Value of 3% on 20th Year = 0.55368

Present Value of Annuity of 3% Over 20 Period = 14.87747

Interest paid Semi-Annually = $90,00,000 × 4.50%

= $4,05,000

Cash Flows PV Table Value Amount Present value
Par(Maturity) Value 0.55368 $90,00,000 $49,83,120
Interest (Annuity) 14.87747 $4,05,000 $60,25,375
Selling Price of The Bond $11,008,495
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