Skysong Inc. manufactures cycling equipment. Recently, the vice president of ope

Question

Skysong 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 $3,205,500 of 10% 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 12%.

As the controller of the company, determine the selling price of the bonds. Round factor values to 5 decimal places, and final answer to 0 decimal places.

Selling price of the bonds $_______

Explanation / Answer

ans) The 160275 is the semi annual interest payment, based on the coupon or face rate of 10% on $3205500. But the market rate of 12% determines the selling price. You need to get the PV of the bonds face amount plus the PV of the Annuity amount of 160275, both based on 30 compounding periods.

The PV of 3205500, its FV, to be paid in 15 yrs, at market rate of 6% for 30 periods, is 558078 (3205500 X 0.1741) The PV of an Ordinary Annuity of 160275 (since it's paid at the end of the 6 mo. period, not the beginning), also at 6% for 30 periods, is 2206153 (13.7648 X 160275)

Combined PV (its Selling price) is 558078 + 2206153 = 2764231

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