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Calculating the issue price of bonds

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On January 1, 2014, Marino Corporation issued eight year bonds with a face value of $5,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6%...................................... .627
Present value of 1 for 8 periods at 8%...................................... .540
Present value of 1 for 16 periods at 3%..................................... .623
Present value of 1 for 16 periods at 4%..................................... .534
Present value of an annuity for 8 periods at 6%........................ 6.210
Present value of an annuity for 8 periods at 8%........................ 5.747
Present value of an annuity for 16 periods at 3%........................ 12.561
Present value of an annuity for 16 periods at 4%........................ 11.652

What is the issue price of the bonds?

a. $4,417,800
b. $4,424,100
c. $4,600,000
d. $5,619,000

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Solution Summary

Solution describes the steps to estimate the issue price of the bonds in the given case.

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Semi annual interest payment=5000000*6%/2=$150000

PV of interest payments=Semi annual interest payment*Present value of an annuity for 16 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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