Final answer:
To calculate the issue price of Pharaoh Co.'s bonds, we multiply the semiannual interest amount ($8,880) by the present value of an annuity table value for 20 periods at 3%, which accounts for the market interest rate of 6% when bonds pay semiannually over ten years.
Step-by-step explanation:
When calculating the issue price of bonds, the process typically involves discounting future cash flows to their present value. Given that Pharaoh Co. issued $111,000 of ten-year, 8% bonds that pay interest semiannually and are sold to yield 6%, we need to consider two components to find the issue price: the present value of the annuity (interest payments) and the present value of the principal amount to be repaid at maturity.
To find the present value of the annuity (the semiannual interest payments), we look at option b, which involves multiplying the semiannual interest payment ($111,000 * 8% / 2 = $4,440) by the present value of an annuity table value for 20 periods (10 years, semiannually) and 3% (the semiannual market interest rate):
- b) multiply $8880 (as it is semiannual, so $4,440 times 2) by the table value for 20 periods and 3% from the present value of an annuity table.
Thus, the issue price of the bonds includes the present value of these semiannual interest payments calculated at the market interest rate of 6% (3% per period for 20 periods).