Brief Exercise G-15 Sunland Company is about to issue $306,100 of 10-year bonds

Question

Brief Exercise G-15 Sunland Company is about to issue $306,100 of 10-year bonds paying an 9% interest rate, with interest payable semiannually. The discount rate for such securities is 10%. ick her (For calculation purposes, use 5 decimal places as displayed in the factor table provided. In this case, how much can Sunland expect to receive from the sale of these bonds? (Round answer to O decimal places,e.g. 2,575.) Sunland can expect to receive Click if you would like to Show Work for this question: Open Show Work ctor tabl LINK TO TEXT Question Attempts: 0 of 5 used SAVE FOR LATERSUMIT ANSWER

Explanation / Answer

The price of a bond is given by the following formula:

where, r is the interest rate prevailing in the market, c is the coupon rate on the bond, t is the time periods occurring over the term of the bond and F is the face value of the bond

Since the interest is paid semiannually the bond interest rate per period is 4.5% (= 9% ÷ 2), the market interest rate is 5% (= 10% ÷ 2) and number of time periods are 20 (= 2 × 10). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:

287049.70

Present Value of bond = c × F × 1 ? (1 + r)-t /r + F/(1 + r)t

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