Question

On January 2, 2008, Sanborn Corporation issued 10 year bonds with a face value of $300,000...

On January 2, 2008, Sanborn Corporation issued 10 year bonds with a face value of $300,000 and 8% face interest, payable semi-annually. The bonds were issued to yield an effective interest rate of 10% (the market rate). What is the present value of the bonds on the issue date? (How much cash will Sanborn Corp receive on the issue date) Show your computations.

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Answer #1

Annual market rate = 10%

Semi annual market rate = 5%

Semi Annual interest payment = 300,000 x 8% x 6/12

= $12,000

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 300,000 x Present value factor (5%, 20)

= 300,000 x 0.37689

= $113,067

Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 12,000 x Present value annuity factor (5%, 20)

= 12,000 x 12.46221

= $149,547

Present value of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds

= $113,067 + 149,547

= $262,614

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