New University plans to issue a $2,000,000 bond. The money is to buy equipment f

ID: 2783444 • Letter: N

Question

New University plans to issue a $2,000,000 bond. The money is to buy equipment for its physics laboratories. The bond matures in 10 years and requires semiannual interest payments. The stated interest rate is 6 percent, but rates have fallen to 5.96 percent in the market. How much will the University receive when it issues the bond? New University plans to issue a $2,000,000 bond. The money is to buy equipment for its physics laboratories. The bond matures in 10 years and requires semiannual interest payments. The stated interest rate is 6 percent, but rates have fallen to 5.96 percent in the market. How much will the University receive when it issues the bond?

Explanation / Answer

PVAF at 2.98%

5.96/2

2.98%

PVAF at 4.5%

1-(1+r)^-n / r

1-(1.0298)^-20 / .0298

14.90502

PVF at 4.5%

1/(1+r)^n

1/(1.0298)^20

0.55583

value of bond

interest*PVAF + face value*PVF

60000*14.90502 + 2000000*.55583

2005960

Interest =6%/2 = 3%

2000000*3%

60000

Face value

2000000