Question

Sweet Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,088,700 of 14% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 12%. As the controller of the company, determine the selling price of the bonds.

Answer 1

$4,775,565.49

Step-by-step explanation:

The computation of the selling price of the bond is shown below:

Particulars Amount PV factor 6% Present value

Semi-annual interest $216,209 19.60044 $4,237,791.53

Principal $3,088,700 0.174110131 $537,773.96

Total $4,775,565.49

Working notes

Semi-annual interest $216,209 = $3,088,700 × 14% × 6 ÷ 12

PV factor 3%:

Semi-annual interest 13.76483115 = {(1 - (1.06)^-30) ÷ 0.06 }

Principal 0.174110131 = {1 ÷ 1.03^30}