Question

Dempsey Railroad Co. is about to issue 286,000 of 9 year bonds paying an 12% interest rate, with interest payable semiannually. The discount rate for such securities is 8%

Question:

How mych can Dempsey expect to receive for the sale of these bonds?

Dempsey can expect to recieve $____

CALCULATOR FULL SCREEN PRINTER VERSION BACK Brief Exercise A-13 Dempsey Railroad Co. is about to issue $286,000 of 9-year bonds paying an 12% Interest rate, with interest payable semiannually. The discount rate for such securities 8%. 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 o decimal places, 6.0.2,525.) Dempsey can expect to receive Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT By accessing this Question Assistance, you will learn while you earn points based on the Point Potential policy set by your instructor SUBMIT ANSWER Question Attempts: 0 of 3 used SAVE FOR LATER Earn Maximum Points available only if you % answer this question correctly in two attempts Barn or less. Version 4.24 acy Policy. I 2000-2019 John Wiley Sons, Inc. All Rights Reserved. A Division of John Wiley & Sons Inc.

Answer 1

Solution Face value of Bonds $286,000 Coupon rate of interest 12.00% Market rate of interest (Discount rate) 8.00% Interest payment frequency Semi-annually Bonds maturity period/Bonds life 9 Years Total no. of coupon payments till maturity (9 Years x 2) 18 Semi-Annual interest payment Face value x Coupon rate of interest/2 = $286,000 x 12%/2 $17,160 Since, the discount rate is lower than the coupon rate of interest, these bonds shall be issued premium Computation of issue price of bonds Semi-annual interest payment $17,160 Present value of an ordinary annuity of $1 for 18 periods at 4 % (note 1) 12.65930 Present value of Semi-annual interest payments ($17,160 x 12.65930) $217,234 Face value of bonds to be repaid at the time of maturity $286,000 Present value of $1 for 18 periods at 49% (note 1) 0.49363 Present value of payment made on maturity ($286,000 x 0.49363) $141,178 Issue price of Bonds $358,412 Dempsey can expect to receive $358,412 Note 1: Since, the interest payment is semi-annually, hence the period shall be twice (9 years x 2), and the interest rate shall be half (8%/2) to select the present value factor. Note 2: Present value annuity factor and present value factor is rounded off upto 5 decimal points Present value of an ordinary annuity of $1 for 18 periods at 4% can be calculated as under: PV(8%/ 2,9*2,-1 ,,) = 12.65930 Present value annuity factor (Excel formula) Present value of $1 for 18 periods at 4% can be calculated as under: Present value factor (Excel formula) 1/(1 8%/2)A(9*2 ) = 0.49363