On January 1, 2015, East Lansing, Inc, issues $2,000,000 of 10 percent, 5-year bonds that pay interest of $100,000 semiannually.
The market rate is 8 percent at the time of issuance. The issue price of the bonds is:____a. $1,852.810 b. $1888,970 c. $1.999.970 d. $2,162.290
1 answer:
Answer:
The answer is option D
Explanation:
The bond can be issued at par, at a discount or at a premium depending on the coupon rate and the market interest. The price of the bond which pays semi annual coupon can be calculated using the formula of bond price. The formula to calculate the price of the bond is attached.
First we need to determine the semi annual coupon payment, periods and YTM.
Semi annual coupon payments = 2000000 * 0.1 * 6/12 = 100000
Semi annual periods = 5 * 2 = 10
Semi annual YTM = 0.08 * 6/12 = 0.04
Bond Price = 100000 * [(1 - (1+0.04)^-10) / 0.04] + 2000000 / (1+0.04)^10
Bond Price = $2162217.916
The price of the bond is thus $2162290 approx. The difference in answers is due to rounding off.
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Answer: c. $81,202
Explanation:
The inflow will be annual and constant which makes it an annuity. Given the discount rate of 12% and a useful life of 8 years, the present value interest discount factor based on the table is = 4.968.
Option 1 present value
= 48,410 * 4.968
= $240,500.88
Option 2 present value
= 50,427 * 4.968
= $250,521.34
Option 3 present value
= 81,202 * 4.968
= $403,412
Option 3 is the closest option with the difference being down to rounding errors. The annual inflow would have to be $81,202 to make the investment in the equipment financially attractive.
