Question

On July 1, 2002, SureFire Company issued 25,000, 15-year, CAD 1,000 bonds to finance future corporate expansion with interest payable on December 31 and June 30. The coupon rate was 8.0%, compounded semi-annually when the bonds were printed on June 1, 2002, which approximated the market rate for a company of SureFire’s risk at that time. By July 1, 2002, when the bonds were sold, the market rate had fallen to 7.5%, compounded semi-annually.

REQUIRED:
Calculate the proceeds from this bond issue on July 1, 2002.
What is the bond quotation?

Answer 1

To calculate the proceeds from the bond issue on July 1, 2002, you can use the present value formula to find the present value of the future cash flows associated with the bond. The bond will be sold at a premium because the market rate has fallen to 7.5% from the coupon rate of 8.0%.

Step-by-step explanation:

To calculate the proceeds from the bond issue on July 1, 2002, we need to calculate the present value of the future cash flows associated with the bond. Since the bond has a coupon rate of 8.0% and the market rate had fallen to 7.5%, compounded semi-annually, the bond will be sold at a premium. Here's how you can calculate the proceeds:

1. Calculate the semi-annual interest payment by multiplying the coupon rate by the face value of the bond: 1,000 * 0.08 / 2 = CAD 40.
2. Calculate the present value of the semi-annual interest payments using the market rate: CAD 40 / (1 + 0.075/2) + CAD 40 / (1 + 0.075/2)^2 + ... + CAD 40 / (1 + 0.075/2)^30.
3. Calculate the present value of the face value using the market rate: CAD 1,000 / (1 + 0.075/2)^30.
4. Add the present value of the semi-annual interest payments and the present value of the face value to get the proceeds from the bond issue.