Katarina Witt, Inc. Manufactures skating equipment Recently the Vice President o

Question

Katarina Witt, Inc. Manufactures skating equipment Recently the Vice President of Operations of the company has requested construction of a new plant to meet the increasing needs for the company's skates. After a careful evaluation of the request the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on January 1, 2006, due on January 1, 2016, with interest payable each January 1 and July 1. At the time of issuance, the market interest rate for Similar financial instruments is 10%. As the controller of the company, determine the selling price of the bonds (round to the nearest one); Did the bonds sell at a premium discount? Determine the amount of Premium/Discount at date of issuance:

Explanation / Answer

a Bond Price formula C*[1-[1/(1+i)n]/i+M/(1+i)n Bond Selling Price= 11000*(1-1/(1+0.05)^20)/0.05+200000/(1+0.05)^20 =     212,462 C= (200000*11%)/2 =       11,000 M=                                                                         200,000 i 10% Half yearly 5% n 10*2=20 b Bond Should issue at premium, because selling price is more than par value c Premium Amount 212462-200000 = 12462

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