Marwick Corporation issues 28%, 5 year bonds with a par value of 1,200,000 and s

Question

Marwick Corporation issues 28%, 5 year bonds with a par value of 1,200,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 26%. What is the bond's issue (selling) price, assuming the Present Value of $1 factor for 13.0% and 10 semi-annual periods is 0.2946 and the present value of an annuity factor for the same rate and period is 5.4262? Marwick Corporation issues 28%, 5 year bonds with a par value of 1,200,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 26%. What is the bond's issue (selling) price, assuming the Present Value of $1 factor for 13.0% and 10 semi-annual periods is 0.2946 and the present value of an annuity factor for the same rate and period is 5.4262?

Explanation / Answer

Bond's issue (selling) price is calculated below:-

  Semi-annual interest = 1200000 * 14%(NOTE 1) = 168000 [ NOTE 1 = 28/2 = 14% ]

Cumulative Present value factors @ 13% for 10 Semi-annual periods = 5.4262

1) Present value of Semi-annual interest payment = 168000 * 5.4262 = 911601.6

   2) Present value of principal payment of bond at the end of 10th semi annual period = 1200000 *0.2946

= 353520

Bond's issue (selling) price = 911601.60 + 353520 = 1265121.6 i.e., $ 1265122 (approx)

Conclusion:- Bond's issue (selling) price = $ 1265122

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