Question

Martinez 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 $3,054,300 of 12% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%. Click here to view factor tables As the controller of the company, determine the selling price of the bonds

Answer 1

Coupon Rate = 12%

Semi- annual Coupon rate = 6%

Semi-annual coupon = $3,054,300 * 6% = $183,258

Bond Issuance Price = Present Value of Bond at Market rate + Present Value of Annuity of Interest payment at Market rate

Market Rate of Interest = 8%

Semi-annual Market rate of Interest = 4%

Maturity = 15 years or 30 semi-annual period

Present value of Bond at Market Rate = $3,054,300 * 0.3083

Present Value of Bond at Market Rate = $941,640.69

Present Value of annuity of Interest Payment at Market Rate = $183,258 * 17.2920

Present Value of Annuity of Interest payment at Market rate = $3,168,897.34

Bond Issuance Price = $941,640.69 + $3,168,897.34

Bond Issuance Price = $4,110,538.03