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Corp1 issued $250,000 of 3-year bonds with 5% interest payable semiannually at a time when the...

  1. Corp1 issued $250,000 of 3-year bonds with 5% interest payable semiannually at a time when the

    market rate of interest was 6%. How much did the company receive in issuance proceeds?

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Answer #1

Computation of cash proceeds from issuance of Bonds:

Cash proceeds = Coupon Amount x Present Value Annuity factor (r,n) + Face value x Present Value interest factor (r,n)

Coupon Amount = $250000 x 5% x 1/2 = $6250

Semiannual market interest rate = 6% / 2 = 3%

n = 3 years x 2 = 6 semiannual period

Cash proceeds = $6250 x Present Value Annuity factor (3% , 6) + $250000 x Present Value interest factor (3% ,6)

= $6250 x 5.41719 + $250000 x 0.83748

= $33857.44 + $209370

= $243227.44

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