Emmett Company issued $20,000,000 of serial bonds on January 1, 2015. The bonds carried an 8% stated interest rate paid semi-annually. The market rate on the date of issuance was 7.8% and the bonds mature in five years on December 31, 2019. One-fifth of the stated value of the bonds are required to be paid off at the end of each year. What was the proceeds on the issuance of the bonds on January 1, 2015?
Solution
Emmett Company
Determination of the proceeds on the issuance of the bonds on January 1, 2015:
Face value of bonds issued = $20,000,000
Number of periods, n = 5 years x 2 = 10 periods
Market rate on the date of issue, r = 7.8% x 6/12 = 3.9%
PV factor = 1/(1+r)n = 1/(1+3.9)10 = 0.68209
Present value of bonds issued = $20,000,000 x 0.68209 = $13,641,800
Present value of interest payments –
Semiannual interest payments = $20,000,000 x 8% x 6/12 = $800,000
PV of interest payments = 800,000 x annuity due of $1 at 3.9% for 10 periods
PV of interest payments = $6,521,139
Bond issue price = 13,641,800 + 6,521,139 = $20,162,939
Hence, proceeds from bond issue = $20,162,939
Get Answers For Free
Most questions answered within 1 hours.