Question

Bond Issue Price

Park Manufacturing issued $1,200,000, 6-year, 5% bonds on January 1, 20Y4. Park’s effective cost of borrowing at that time was 8%. The following time value of money factors may be useful:

PV of a single sum for 6 periods at 5% = 0.74622         PV of an annuity for 6 periods at 5% = 5.07569
PV of a single sum for 6 periods at 8% = 0.63017         PV of an annuity for 6 periods at 8% = 4.62288

How much cash did Park receive from the issuance of the bonds? 

Round your answer to the nearest whole dollar. Include appropriate commas and no dollar signs (e.g. 1,000)

Answer 1

Annual interest payment = Par value of bonds x Stated interest rate

= 1,200,000 x 5%

= 60,000

Market interest rate = 8%

Maturity period of bonds = 6 years

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

= 1,200,000 x Present value factor (8%, 6)

= 1,200,000 x 0.63017

= 756,204

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

= 60,000 x Present value annuity factor (8%, 6)

= 60,000 x 4.62288

= 277,373

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

= 756,204+277,373

= 1,033,577

Park receive from the issuance of the bonds = 1,033,577

Kindly comment if you need further assistance. Thanks