Determining the Proceeds from Bond Issues Madison Corporation is authorized to i

Question

Determining the Proceeds from Bond Issues

Madison Corporation is authorized to issue $810,000 of 5-year bonds dated June 30, 2016, with a stated rate of interest of 11%. Interest on the bonds is payable semiannually, and the bonds are sold on June 30, 2016.

Required:

Determine the proceeds that the company will receive if it sells the following: (Click here to access the tables to use with this exercise and round your answers to two decimal places, if necessary.)

Explanation / Answer

1. Bonds to yield 12%

Semi-annual Interest on bonds =810,000*11%/2=44550, which is in the form of annuity for 10 periods.

Number of terms= 5*2=10

I=12/2=6

Issue price of bond=Present Value(PV) of bond=

PV of interest+ PV of amount to be paid on redemption

=44550( PVOA i=6,n=10)+ 810000*( PV factor of 1 at 6% for 10 semi-annual period)

=44550*7.36009+810000*0.55839

=372892.0095+452295.9

=$780187.91

Since, market interest is higher than bond interest rate, the bonds are issued at discount.

2. Bonds to yield 10%

Semi-annual Interest on bonds =810,000*11%/2=44550, which is in the form of annuity for 10 periods.

Number of terms= 5*2=10

I=10/2=5

Issue price of bond=Present Value(PV) of bond=

PV of interest+ PV of amount to be paid on redemption

=44550( PVOA i=5,n=10)+ 810000*( PV factor of 1 at 5% for 10 semi-annual period)

=44550* 7.72173 +810000*0.61391

=344003.0715+497267.1=

$841270.17

Since, market interest is lower than bond interest rate, the bonds are issued at premium.

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