Question

On September 30, 2024, the Techno Corporation issued (8 % ) stated rate bonds with a face amount of ( $ 480 ) million. The bonds mature on September 30, 2044 (20 years). The market rate of interest on the date of issue was (9 % ).

What is the issue price of the bonds?
(a) ( $ 480 ) million
(b) ( $ 422.4 ) million
(c) ( $ 537.6 ) million
(d) None of the above

Answer 1

To calculate the issue price of the bonds, we can use the present value formula. Plugging in the values given, we find that the issue price of the bonds is $122.52 million. The correct answer is option (d).

Step-by-step explanation:

To calculate the issue price of the bonds, we need to use the present value formula. The formula is as follows:

Issue Price = (Annual Interest Payment x Present Value Factor) + (Face Value of Bonds x Present Value Factor)

Given that the annual interest payment is 8% of $480 million, which is $38.4 million, and the face value of the bonds is $480 million, we can substitute these values into the formula and calculate the present value factor.

The present value factor can be calculated using the following formula:

Present Value Factor = 1 / (1 + Market Rate of Interest) ^ Number of Years

Plugging in the values, we get:

Present Value Factor = 1 / (1 + 9%) ^ 20 = 0.2375

Now, we can substitute the present value factor into the first formula to find the issue price:

Issue Price = ($38.4 million x 0.2375) + ($480 million x 0.2375) = $9.12 million + $113.4 million = $122.52 million

Therefore, the correct answer is (d) None of the above. The issue price of the bonds is $122.52 million.