Question

# Spin Corporation manufacturers cycling equipment for fitness classes. Recently, the company’s Executive VP of Operations requested...

Spin Corporation manufacturers cycling equipment for fitness classes. Recently, the company’s Executive VP of Operations requested construction of a new plant to meet the increasing demand for the company’s workout bikes. After considering the request, the BOD has decided to raise funds for the new plant by issuing \$2,000,000 of 11% term corporate bonds on March 1, 2021, due on March 1, 2035, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. Required: 1. Determine the selling price of the bonds. You may use the factor tables A.2 and A.4 in appendix A, or a financial calculator or Excel’s PV function to complete the calculation. 2. What is the basis of measurement for the bond?

We have Maturity Value of Bonds = FV = 2,000,000
Coupon = 11% Semiauual.
So Int on Bond per period = PMT = 11%*2,000,000/2 = 110,000
Tenure of Bond = 2021-2035 = 14 Yrs
So No of period = nper = 14 Yr*2 period/Yr = 28
CUrrent Mkt Rate = 10%.
So HY Rate = Rate = 10%/2 = 5%

 Pv Factor Face Value \$2,000,000 0.2551 \$510,200 PVIF (5%,28) Interest \$110,000 14.8981 \$1,638,791 PVIFA (5%,28) The selling price of the bonds \$2,148,991

SO Selling price of Bond is \$2,148,991
This is more than Maturity Value as Coupon Rate 11% is more than Current Mkt Rate of 10%. Hence the Bonds are issued at Premium

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