Question

. On January 2, 2012, Wine Corporation wishes to issue $3,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds. Present value of 1 at 8% for 10 periods 0.4632 Present value of 1 at 10% for 10 periods 0.3855 Present value of an ordinary annuity at 8% for 10 periods 6.7101 Present value of an ordinary annuity at 10% for 10 6.1446 periods A) $3,000,000 B) $2,631,204 C) $3,000,018 D) $3,318,078

Answer 1

The correct option is B,$2,631,204

Step-by-step explanation:

The amount Wine corporation would realize from the sale of the bonds is the present value of all cash flows payable by the bond which includes the annual interest payments as well as the principal repayment in 10 years.

amount of interest payment=$3,000,000*8%=$240,000

The $240,000 would be received by investors for 10 years

The principal is the face value of $3000,000 payable in year ten

Present of face value=$3,000,000*0.3855=$1156500

present value of all interest payments=$240,000*6.1446=$1474704

Total present values=$1474704 +1156500 =$2631204