Question

Courier Logistics Corp. will issue $2,400,000 in 8-year bonds that pay 5% annually. The market rate for bonds of similar riskiness and maturity is 4%. How much cash will Courier Logistics Corp. receive from this bond issuance?
a. $2,529,241.
b. $2,374,124.
c. $2,561,585.
d. $2,400,000.

Answer 1

Answer:

Courier Logistics Corp will receive c. $2,561,585 from this bond issuance

Explanation:

Note that the Yield to Maturity is less than the Coupon Rate, therefore the bond is trading at a Premium (price will be greater than the par value)

The price of the bond, PV is calculated as follows :

PMT = $2,400,000 × 5% = $120,000

P/YR = 1

N = 8

FV = $2,400,000

YTM = 4%

PV= ?

Using a Financial Calculator, the price of the bond, PV is $2,561,585.87 or $2,561,585.