Question

Dempsey Railroad Co. is about to issue $266,000 of 7-year bonds paying an 12% interest rate, with interest payable semiannually. The discount rate for such securities is 10%.

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

How much can Dempsey expect to receive for the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.)

Dempsey can expect to receive

$

Answer 1

Dempsey can expect to receive	=	$    2,92,331
Workings:
Cash flow	Period	Amount	P.V Factor @ 5%	Present Value
Maturity value	14	$    2,66,000	0.50507	$         1,34,349
Interest (annuity)	1 to 14	$       15,960	9.89864	$         1,57,982
Total proceeds				$         2,92,331
Working notes:-
Interest is payable semiannualy i.e twice a year
Semiannual coupon rate	=	Coupon rate / 2
	=	12% / 2
	=	6%
Number of semiannual periods	=	Number of years X 2
	=	7 years X 2
	=	14 years
Interest payment	=	$266000 X 6%
	=	$       15,960
Semiannual market interest rate	=	10% / 2
	=	5%