Question

Sunland Company is about to issue $450,000 of 10-year bonds paying an 11% interest rate, with interest payable annually. The discount rate for such securities is 13%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) In this case, how much can Sunland expect to receive from the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,575.)

Answer 1

A bond's issuance price is equal to the present value of its principal plus present value of its interest payments.

Present Value of principal = $450,000 * PV factor (n = 10, i = 11%) = $450,000 * 0.35218 = $158,481

Present Value of Interest = Annual interest * PV of annuity factor (n = 10, i = 11%) = ($450,000 * 11%) * 5.88923 = $49,500 * 5.88923 = $291,516.89

Bond Issuance price = PV of principal + PV of Interest = $158,481 + $291,517 = $449,978

Sunland can expect to receive $449,998 from the sale of these bonds.