Question

Emmett Company issued $20,000,000 of serial bonds on January 1, 2015. The bonds carried an 8%...

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?

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Answer #1

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

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