McWherter Instruments sold $540 million of 10% bonds, dated January 1, on Januar
ID: 2421834 • Letter: M
Question
McWherter Instruments sold $540 million of 10% bonds, dated January 1, on January 1, 2016. The bonds mature on December 31, 2035 (20 years). For bonds of similar risk and maturity, the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Blanton Technologies, Inc., purchased $540,000 of the bonds as a long-term investment. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds issued on January 1, 2016. (Enter your answer in whole dollar.)
Explanation / Answer
interest paid semiannually = 540 million *10% * 1/2 = 27 million
Time = 20 years * 2 = 40years
discounting rate = 12% * 1/2 = 6%
Price of the bonds issued on January 1, 2016 = interest * PVIFA (y=1 to 40)+ par value * PVFIA (y=40)
= 27 * 15.046 + 540 * 0.097722
= 459.0119 million