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Vitek1552 [10]
3 years ago
10

Leahy Corp. sells $300,000 of bonds to private investors. The bonds are due in five years, have a 6% coupon rate, and interest i

s paid semiannually. The bonds were sold to yield 4%.What proceeds does Leahy receive from the investors?a. $300,000b. $274,345c. $326,948d. $299,999e. None of the above
Business
1 answer:
emmasim [6.3K]3 years ago
3 0

Answer:

c. $326,948

Explanation:

we must determine the market price of the bonds:

market price = PV of face value + PV of coupons

  • PV of face value = $300,000 / (1 + 2%)¹⁰ = $246,104.49
  • PV of coupons = $9,000 (coupons) x 8.9826 (PV annuity factor 2%, 10 periods) =   $80,843.40

total market price = $326,947.89 ≈ $326,948

since the market rate is lower than the coupon rate, the bonds should be sold at a premium.

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Answer:

HPR = 0.371%

Explanation:

we must first determine the price of the bond in 1 year:

present value of face value = $1,000 / (1 + 6.25%)⁶ = $695.07

present value of coupon payments = $52.50 x 4.87894 (PV annuity factor, 6.25%, 6 periods) = $256.14

market price in 1 year = $951.21

since you bought the bond at face value (market value = YTM), the the holding period return is:

HPR = [(ending price - actual price) + dividends received] / actual price

HPR = [($951.21 - $1,000) + $52.50] / $1,000 = $3.71 / $1,000 = 0.371%

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In such case, when the goods are sold on credit to the buyer, this will lead to a debit on the account receivable account and this will bring about an increase to the company's assets.

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