Ayayai Inc. manufactures cycling equipment. Recently, the vice president of oper
ID: 2339807 • Letter: A
Question
Ayayai Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,432,300 of 8% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%.
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As the controller of the company, determine the selling price of the bonds
Explanation / Answer
semiannual interest = 3432300*.08*6/12= 137292
years to maurity = 15 years [ march 1 2017 -march 1 2032 ]
semiannual months = 15*2 =30
semiannual yield = 8*6/12 = 4%
Price =[PVA 4%,30 *Interest ] +[PVF 4%,30 *face value]
=[17.29203*137292]+[ .30832*3432300]
= 2374057.38+ 1058246.74
= 3432304 [rounded to 3432300 ]
since the coupon rate is equal to yield ,bond is selling at par therefore selling price is equal to par value which is 3432300