P9-74A (similar to) On February 28, 2016, Stingray Corp. issues 8%, 10-year bond
ID: 2564598 • Letter: P
Question
P9-74A (similar to) On February 28, 2016, Stingray Corp. issues 8%, 10-year bonds payable with a face value of $900,000. T he bonds pay interest on February 28 and August Stingray Corp. amortizes bond discount by the straight-line method. Read the requirements Requirement 1 if the market interest rate is 7% when Stingray Corp. issues its bonds will the bonds be priced at par, at a premium, or at a discount? Explai The 8% bonds issued when the market interest rate is 7% will be priced at a premium more than par value to acquire them. Requirement 2 if the market interest rate is 9% when Stingray Corp. issues its bonds, will the bonds be priced at par, at a premium or at a discount? Explai The 8% bonds issued when the market interest rate is 9% will be priced at They are attractive in this market, so investors will pay |"They are in this market, so investors will pa | to acquire them. a discount a premium par (maturity) value Click to select your answer(s) and then click Check Answer. partsExplanation / Answer
2.
Face value of the bonds = $900,000
Coupon rate = 8%
Cash interest paid to the bondholders each semiannual period = $900,000 x 8% x 1/2 = $36,000
Semianual market interest rate = 9%/2 = 4.5%
Life of bonds = 10 years
Number of semiannual periods = 10 x 2 = 20
Calculate the issue price of the bonds by adding the present values of the cash interest paid to bondholders over the life of the bonds and the face value to be repaid to the bondholders at maturity.
Present value of cash interest paid over the life of the bonds
= Cash interest paid each semiannual period x PVIFA (4.5%, 20)
= $36,000 x 13.008
= $468,288
And,
Present value of face value to be repaid at maturity
= Face value x PVIF (4.5%, 20)
= $900,000 x 0.4146
= $373,500
Therefore,
Issue price = $468,288 + 373,500 = 841,788
The 8% bonds issued when the market interest rate is 9% will be priced at a discount. They are not/less attractive in the market, so investors will pay $841,788 to acquire them.
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