123k views
5 votes
clancey inc. issues $2,000,000 of 7% bonds due in 10 years with interest payable at year-end. the current market rate of interest for bonds of similar risk is 8%. what amount will clancey receive when it issues the bonds?

User Mumfordwiz
by
8.1k points

1 Answer

4 votes

Final answer:

To calculate the amount Clancey Inc. will receive when it issues the bonds, use the present value formula to calculate the present value of the bond's future cash flows. In this case, Clancey Inc. will receive $2,331,404 when it issues the bonds.

Step-by-step explanation:

To calculate the amount Clancey Inc. will receive when it issues the bonds, we need to calculate the present value of the bond's future cash flows.

The bond has a face value of $2,000,000 and a coupon rate of 7%. The interest is payable annually at year-end. The market rate of interest for bonds of similar risk is 8%.

Using the present value formula, we can calculate the present value of the bond's future cash flows:

PV = C * (1 - (1 / (1 + r)^n)) / r + F / (1 + r)^n

Where PV is the present value, C is the annual coupon payment, r is the market interest rate, n is the number of periods, and F is the face value.

For this bond, the annual coupon payment is $2,000,000 * 7% = $140,000, the market interest rate is 8%, and the number of periods is 10.

Calculating the present value:

PV = $140,000 * (1 - (1 / (1 + 8%)^10)) / 8% + $2,000,000 / (1 + 8%)^10

= $886,426 + $1,444,978

= $2,331,404

Therefore, Clancey Inc. will receive $2,331,404 when it issues the bonds.

User Murolem
by
8.1k points