Harris Corporation issued $2,000,000, 10-percent, 10-year bonds on January 2, Ye

Question

Harris Corporation issued $2,000,000, 10-percent, 10-year bonds on January 2, Year 2. The bonds pay interest semiannually on January 1 and July 1. The bonds were priced on the market to yield 8 percent.

The issue price of the bonds is calculated as follows:
a.
the present value of $2,000,000 at 10 percent for 10 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods
b.
the present value of $2,000,000 at 5 percent for 20 periods, plus the present value of an annuity of $100,000 at 5 percent for 20 periods
c.
the present value of $2,000,000 at 8 percent for 10 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods
d.
the present value of $2,000,000 at 4 percent for 20 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods
e.
none of the above

Explanation / Answer

c. the present value of $2,000,000 at 8 percent for 10 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods 10% is used to figure the amount of the interest they pay out semiannually - 2,000,000 * 10% and divided by 2 (6 months) = 100,000. The cash payments are then discounted using the 8% rate. The 2 million at 8% for 10 years and the semiannual payments at 4% for 20 periods since they are made every 6 months.

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