Question

Metlock 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 $3409700 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

Answer 1

Face Value of Bonds = $3,409,700

Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5% * $3,409,700
Semiannual Coupon = $170,485

Annual Interest Rate = 8%
Semiannual Interest Rate = 4%

Time to Maturity = 15 years
Semiannual Period = 30

Selling Price of Bonds = $170,485 * PVA of $1 (4%, 30) + $3,409,700 * PV of $1 (4%, 30)
Selling Price of Bonds = $170,485 * 17.29203 + $3,409,700 * 0.30832
Selling Price of Bonds = $3,999,310

Selling price of the bonds is $3,999,310