Question

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?

Answer 1

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