Question

Sunland Company issued $102000 of ten year, 12% bonds that pay interest semiannually. The bonds are sold to yield 10%. One step in calculating the issue price of the bonds isto multiply $12240 by the table value for 10 periods and 12% from the present value of an annuity table. multiply $12240 by the table value for 20 periods and 6% from the present value of an annuity table. multiply $12240 by the table value for 20 periods and 5% from the present value of an annuity table. none of these answers is correct. Attempt of 1 used

Answer 1

Answer

• Correct Answer: Option #4: None of these answer is correct.
• Concept:

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

• Hence, based on above concept, Semi annual interest payment will be multiplied by the semi annual market yield interest rate discount present value factor, based on 20 semi annual periods. [20 periods = 10 years x 2 semi annual payments].

= ($102000 x 12% x 6/12) by table value for 20 period and 5% from PV of annuity table
= $ 6120 x PVA $1 for 20^th period.

• None of the option states $ 6120 as interest payment, hence all are wrong.