Question

On June 30, 2019, Holman Construction issued 10-year bonds with a total face value of $2,500,000. When the 8% coupon rate bonds were issued, the market rate was 10%. Assuming that Holman pays interest every six months on December 31st and June 30th, what are the proceeds that Holman Construction received on the issue date, June 30, 2019?

a. $2,188,444.74
b. $2,192,771.64
c. $2,500,000.00
d. $2,839,758.16

Answer 1

a. $2,188,444.74

Step-by-step explanation:

the market value of the bonds is:

PV of face value = $2,500,000 / (1 + 5%)²⁰ = $942,223.71

PV of coupon payments = $100,000 x 12.462 (PV annuity factor, 5%, 20 periods) = $1,246,200

Market value = $942,223.71 + $1,246,200 = $2,188,423.71, the closest answer is a. $2,188,444.74.

There is a rounding error since I used annuity factors. The error represents $21.03/$2,188,444.74 = 0.001%, so it is not significant