Question

Enviro Company issues 13.00%, 10-year bonds with a par value of $480,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10.00%, which implies a selling price of 129 l/8. The straight-line method is used to allocate interest expense.

Using the implied selling price of 129 1/8. what are the issuer's cash proceeds from issuance of these bonds?

Answer 1

The cash proceeds from the bond issuance are $619,800, calculated by multiplying the par value ($480,000) by the selling price percentage (129 1/8%), converting it to a decimal before multiplication.

Step-by-step explanation:

The cash proceeds from the issuance of the bonds by Enviro Company can be calculated by multiplying the par value of the bonds by the selling price percentage determined by the market. The bonds have a par value of $480,000 and are selling at 129 1/8% (or 129.125% when expressed as a decimal).

To find the cash proceeds, we use the formula:
Cash proceeds = Par value × Selling price percentage.
So, the cash proceeds are $480,000 × 1.29125 = $619,800.

This calculation is important as it determines the amount of capital the issuer receives and how much they are obligated to pay back upon the bond's maturity, taking into account the market's perception of risk and the time value of money.