Ayayai Inc. manufactures cycling equipment. Recently, the vice president of oper

Question

Ayayai 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 $3,432,300 of 8% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%.

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As the controller of the company, determine the selling price of the bonds

Explanation / Answer

semiannual interest = 3432300*.08*6/12= 137292

years to maurity = 15 years                  [ march 1 2017 -march 1 2032 ]

semiannual months = 15*2 =30

semiannual yield = 8*6/12 = 4%

Price =[PVA 4%,30 *Interest ] +[PVF 4%,30 *face value]

=[17.29203*137292]+[ .30832*3432300]

= 2374057.38+ 1058246.74

= 3432304    [rounded to 3432300 ]

since the coupon rate is equal to yield ,bond is selling at par therefore selling price is equal to par value which is 3432300

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