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issuance price of the bonds, recommendation for providing loan

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Part 1:
Design Arts, Inc. is a young computer game design company that has been in business for two years. The company has been working on a computer game that is scheduled for release in six months. However, it has exhausted all its financial resources and needs one last loan of $100,000 to help it meet its deadline. The company has not had any revenues up to this point but knows that once the game hits the market, it will be extremely profitable. Would you make a loan to this company? Why or Why not?

Part 2:
Rome Company issued seven-year bonds on January 1. Face value of the bonds is $80,000. The stated interest rate on the bonds is 7%. The market rate of interest at the time of issuance was 10%. The bonds pay interest semiannually. Calculate the issuance price of the bonds.

Show step-by-step solution, all the calculations with explanation. Also, could you explain to me why we must assume the face value of a bond? If different people assume different values, will the final number be different for different people?

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Yes, I would make a loan to the company.

Design Arts is in the business of designing computer games and currently have no revenues. With the help of a loan of $100,000 the company will be able to launch its product and is expected to be extremely profitable in future. The computer gaming industry is highly profitable and has a ...

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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