Question

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of $5,000,000 and a stated interest rate of 8%, payable semiannually on June 30 and December 31. The bonds were sold to yield 6%. The issue price of the bonds is closest to:

Answer 1

"$4,417,800" is the correct solution.

Step-by-step explanation:

According to the question,

Principal amount,

= $5,000,000

Number of period will be:

=
`8* 2`

=
`16`

Interest rate yield per period will be:

=
`(8 \ percent)/(2)`

=
`4` %

Interest rate started per period will be:

=
`(6 \ percent)/(2)`

=
`3` %

Now,

The present value of principal will be:

=
`Principal\ amount* Yield \ discount \ factor`

=
`5,000,000* 0.534`

=
`2,670,000` ($)

The present value of interest will be:

=
`Interest \ amount* Yield \ discount \ factor`

=
`(5,000,000* 3 \ percent)* 11.652`

=
`1,747,800` ($)

hence,

The issue price of bonds will be:

=
`2,670,000+1,747,800`

=
`4,417,800` ($)