Question

When the market rate of interest was at an annual rate of 12%, King company issued $5,000,000, 10-year, 11% bonds payable. The interest on the bonds is to be paid semi-annually.

Calculate the selling price of the bonds:

Answer 1

Answer:- Selling price of bonds is = $4713223

Explanation-Calculation of selling price of bond at issuance=

                B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 5.5% (= 11%/ 2), the market interest rate is 6% (= 12%/ 2) and number of time periods are 20 (= 2*10). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =5.5%*$5000000*{1-(1+6.0%)^-20/6.%} +$5000000/(1+6.0%)²⁰

                         =($275000*11.4699)+ ($5000000*0.3118)

                        = $3154223+$1559000

                       =$4713223