Question

Dempsey Railroad Co. is about to issue $400,000 of 10-year bonds paying an 11% interest rate, with interest payable annually. The discount rate for such securities is 10%

How much can Dempsey expect to receive for the sale of these bonds?

Answer 1

Solution

Here we need to calculaye the price o bond

given inormations

face value of Bond= $400000

period (n) = 10 years

interest/coupon rate = 11%

Discount rate (r) = 10%

Price of bond is equal to the present value of coupon amount Plus present value of principal amount. using discount rate.

Interest amount= 400000*11% = $ 44000

so we can calculate the price of bond as follows

Price = Interest* PVIFA( r, n) + Face value * PVIF(r, n)

Price = 44000*PVIFA(10%, 10 years) + 400000* PVIF(10%, 10 years)

Price = 44000* 6.14456 + 400000*.38554

Price = 270360.64 + 154216

Price = $424576.64

(note due to rounding off of factor decimals answers may be slightly different here is used 5 decimal points in my calculations)