Question

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 bicycles. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,000,000 of 11 percent corporate bonds on April 1, 2019, due on April 1, 2033. Interest is payable annually on April 1 each year. At the time the bonds were issued, the market interest rate for similar financial securities is 10 percent. Determine the selling price of the bonds.

Answer 1

Soln : Here the maturity of the bonds is 14 years from 2019 to 2033.

Interest payabale annually i.e. 11% and market interest rate/discounting rate = 10%

Let P be the price of the bond at which the bonds to be sold.

So, interest earned yearly = 11% *3000000 = $330000

Please refer the table using the NPV method by discounting at 10%, we have calculated the prices of the bond to be issued:

Year	1	2	3	4	5	6	7	8	9	10	11	12	13	14
Cash flow	330000	330000	330000	330000	330000	330000	330000	330000	330000	330000	330000	330000	330000	3330000
Discount factor @10%	0.91	0.83	0.75	0.68	0.62	0.56	0.51	0.47	0.42	0.39	0.35	0.32	0.29	0.26
Present Value	300000.00	272727.27	247933.88	225394.44	204904.04	186276.40	169342.18	153947.44	139952.21	127229.29	115662.99	105148.17	95589.25	876893.08
NPV	3221000.62

Selling Price of the bond = $3221000.62