Question

On january 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. on the issue date, the annual market rate of interest is 6%. the following information is taken from present value tables: present value of an annuity (series of payments) for 10 periods at 3% 8.5302 present value of an annuity (series of payments) for 10 periods at 4% 8.1109 present value of 1 (single sum) due in 10 periods at 3% 0.7441 present value of 1 (single sum) due in 10 periods at 4% 0.6756 what is the issue (selling) price of the bond? multiple choice

O $300,010.00.
O $308,107.00.
O $403,171.62.
O $320,560.80.
O $325,592.40.

Answer 1

The issue (selling) price of the bond is calculated by summing the present value of the semiannual interest payments and the present value of the principal. Using the provided present value factors, the issue price of the bond is $325,592.40. Therefore correct option is E

Step-by-step explanation:

To calculate the issue (selling) price of the bond we must consider both the present value of the annuity of interest payments and the present value of the principal (lump-sum payment) at the end of the bond's term. The bond's interest payments are made semiannually, which means there will be a total of 10 payments over the 5-year period (2 payments per year). The interest payment per period is $300,000 * 8% / 2 = $12,000.

The market interest rate is 6% annually, therefore the relevant semiannual rate is 3%.

Using the present value of an annuity factor for 10 periods at 3% (8.5302) and the present value of 1 for 10 periods at 3% (0.7441), the calculations are as follows:

Present value of annuity (interest payments): $12,000 * 8.5302 = $102,362.40
Present value of lump sum (principal): $300,000 * 0.7441 = $223,230.00

Adding these two amounts give us the total present value, which represents the issue price of the bonds:

Issue price: $102,362.40 (interest payments) + $223,230.00 (principal) = $325,592.40

Therefore, the correct answer is $325,592.40.