On January 2, 2014, Wine Corporation wishes to issue $4,000,000 (par value) of i

Question

On January 2, 2014, Wine Corporation wishes to issue $4,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The market rate on such bonds is 10%. Using the interest factors below, compute the price of bonds on the date of issuance.

Present value of 1 at 8% for 10 periods                                       0.4632

Present value of 1 at 10% for 10 periods                                     0.3855

Present value of an ordinary annuity at 8% for 10 periods          6.7101

Present value of an ordinary annuity at 10% for 10 periods        6.1446

Explanation / Answer

Ans;

b.   $3,508,272

Justification;

$4,000,000 × .08 = $320,000 (annual interest payment)

($320,000 × 6.1446) + ($4,000,000 × 0.3855) = $3,508,272.

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