Question 6 (of 6) Save&r; Sub The folowing information applies to the questions

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Question 6 (of 6) Save&r; Sub The folowing information applies to the questions displeyed below On January 1, 2016 Drennen, ine, issued $3.6 mmon face amount of 7-yeat, 14% statedrate bonds when market interest rates were and mature on December 31, 2022.Tabke 6.4. Table.6-5 (Use appropriate factor from the table provided) The bonds pay semiannual terest each Ju e 30 and December 3 value 10.00 points Required information a. Calculate the proceeds (ssue price) of Drennen, Inc.'s, bonds on January 1, 2016, assuming that the bonds were sold to provide a market rate of return to the investor, (Round PV factor to 4 dacimal places.) References eBook & Resources 8 2 3 5 6 8 9

Explanation / Answer

CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Semi Annual Coupon Payments Par value of the bond issued is   = $36,00,000 Annual Coupon % 14.00% Annual Coupon Amount $5,04,000.00 Semi Annual Coupon Amount $2,52,000.00 Step 2: Calculate number of years to Maturity Number of years to maturity = 7 years Interest is paid semi annyally so total period = 7 Years * 2 = 14 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 12% Bonds interest is paid semi annualy means so discounting factor = 12 % /2= 6 % PVF = 1 / Discount rate = 1/ 1.06 Result of above will again divide by 1.06 , repeat this lat period Period Interest Amount (In Million) PVF @ 6% PresentValue 1 Interest $2,52,000                     0.9434 $2,37,735.85 2 Interest $2,52,000                     0.8900 $2,24,279.10 3 Interest $2,52,000                     0.8396 $2,11,584.06 4 Interest $2,52,000                     0.7921 $1,99,607.60 5 Interest $2,52,000                     0.7473 $1,88,309.06 6 Interest $2,52,000                     0.7050 $1,77,650.06 7 Interest $2,52,000                     0.6651 $1,67,594.39 8 Interest $2,52,000                     0.6274 $1,58,107.92 9 Interest $2,52,000                     0.5919 $1,49,158.41 10 Interest $2,52,000                     0.5584 $1,40,715.48 11 Interest $2,52,000                     0.5268 $1,32,750.46 12 Interest $2,52,000                     0.4970 $1,25,236.28 13 Interest $2,52,000                     0.4688 $1,18,147.43 14 Interest $2,52,000                     0.4423 $1,11,459.84 14 Bond Principal Value $36,00,000                     0.4423 $15,92,283.47 Total $39,34,619.42 Current Bonds Price = $39,34,619.42 Answer = Issue price of the bonds= $39,34,619.42

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