A company 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 $3,275,000 of 12% term corporate bonds on March 1, 2014, due on March 1, 2029, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%.
What is the selling price of the bonds?
This is a tool which is used to raise funds over the long term in return for which a company pays a fixed amount of interest. The latter is paid to the holders of the bond and the principal is repaid at the end of the bond period.
Answer and Explanation: 1
The bond price is given by (P0 )= I(1-(1+r)^-p)/r + F/(1+r)^p
I = semiannual interest payments =$3275000 * 12% * .50 =$196500
r = semiannual...
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fromChapter 10 / Lesson 7
Learn about bond relationships. Read a definition of a secured bond. See a comparison between secured vs unsecured bonds, and term bonds vs serial bonds.