Question

On January 1, 2019, Broker Corp. issued $2,200,000 par value 9%, 9-year bonds which pay interest each December 31. If the market rate of interest was 11%, what was the issue price of the bonds? (The present value factor for $1 in 9 periods at 9% is 0.4604 and at 11% is 0.3909. The present value of an annuity of $1 factor for 9 periods at 9% is 5.9952 and at 11% is 5.5370.)

Answer 1

Answer:

$ 1,956,306.00  

Explanation:

The issue price of the bonds issued is the present  value of all cash flows promised by the bonds  discounted using the market interest rate of 11%.

The cash flows which comprise of annual coupon payment for nine years as well as the repayment of the face value at the end of the ninth year as computed thus:

annual coupon payment=face value*coupon rate=$2,200,000*9%=$198,000.00  

The present value of $198,000 for nine years= 198,000*5.5370=$ 1,096,326

The present of $2,200,000 at the end of nine years=0.3909*2,200,000=$ 859,980.00  

Total present values=$ 859,980+$ 1,096,326=$1,956,306.00