Question

On January 1, 2024, Madison Products issued $40.9 million of 8%, 10-year convertible bonds at a net price of $41.79 million. Madison recently issued similar, but nonconvertible, bonds at 97% of face amount. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 30 shares of Madison's no par common stock. Madison records interest by the straight-line method. On June 1, 2026, Madison notified bondholders of its intent to call the bonds at face value plus a 1% call premium on July 1, 2026. By June 30, all bondholders had chosen to convert their bonds into shares as of the interest payment date. On June 30, Madison paid the semiannual interest and issued the requisite number of shares for the bonds being converted. Required: 1. What is the net price at which Madison recently issued the nonconvertible bonds?

1) $39.73 million
2) $40.00 million
3) $41.79 million
4) $42.00 million

Answer 1

The net price at which Madison issued the nonconvertible bonds is $39.73 million, calculated as 97% of their $40.9 million face amount.

Step-by-step explanation:

The net price at which Madison recently issued the nonconvertible bonds can be determined based on the given information that the bonds were issued at 97% of face amount. Since the face amount of the bonds is $40.9 million, the net price would be 97% of that amount, which equates to:

0.97 × $40.9 million = $39.673 million.

Therefore, the correct answer to what the net price at which Madison recently issued the nonconvertible bonds is option 1) $39.73 million. This calculation assumes rounding to the nearest hundred thousand as expressed in the choices available.

It's important to note that the interest rate, the risk of the bond, and current market conditions can impact the selling price of bonds. When interest rates rise, bonds with lower interest rates sell for less than their face value. Conversely, when interest rates fall, bonds with higher interest rates often sell for a price higher than their face value.