Question

On January 1, 2020, Sheffield Corp. issued ten-year bonds with a face amount of $4500000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 11%. Present value factors are as follows: At 8% At 11% Present value of 1 for 10 periods 0.463 0.352 Present value of an ordinary annuity of 1 for 10 periods 6.710 5.889 The total issue price of the bonds was $3704040. $4140000. $4365000. $4500000.

Answer 1

Answer: $3,704,040

Explanation:

The issue/ selling price of a bond is calculated by the formula:

= Present value of coupon payments + Present value of face value

The coupon payments will be an annuity and in cash terms are:

= 8% * 4,500,000

= $360,000

Selling price:

= (360,000 * Present value of an ordinary annuity factor, 11%, 10 periods) + (4,500,000 * Present value discount factor, 11%, 10 periods)

= (360,000 * 5.889) + (4,500,000 * 0.352)

= $3,704,040