Question

Splish Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,155,200 of 10% term corporate bonds on March 1, 2020, due on March 1, 2035, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2020. At the time of issuance, the market interest rate for similar financial instruments is 8%. What is the selling price of the bonds?

Answer 1

Answer:

Price of bonds = $3,700,798.23

Explanation:

Explanation:

The value of the bond is the present value( PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Splish Inc can be worked out as follows:

Step 1

Calculate the PV of interest payments

Semi annual interest payment

= 10% ×  3,155,200 × 1/2 =  157,760

PV of interest payment

A ×(1- (1+r)^(-n))/r

r- semi-annual yield = 8%/2 = 4%

n- 15× 2 = 30

=  157,760 × (1-(1.04^(-30)/0.04

= 2,727,991.17

Step 2

PV of redemption Value

PV = $3,155,200 × (1.04)^(-30)

=  972,807.06

Step 3

Price of bond

=  2,727,991.17 +972,807.06

= $3,700,798.23

Price of bonds = $3,700,798.23