Computing Bond Issue Proceeds and Issue Price
Your company plans to issue bonds later in the upcoming year. But with the economic uncertainty and varied interest rates, it is not clear how much money the company will receive when the bonds are issued. The company is committed to issuing 2,000 bonds, each of which will have a face value of $1,000, a stated interest rate of 8 percent paid annually, and a period to maturity of 10 years.
Required:
- 1. Compute the bond issue proceeds assuming a market interest rate of 8 percent. (Do not round until totaling the bond proceeds, at which point you should round the total bond proceeds to the nearest thousand dollars.) Also, express the
bond issue price as a percentage by comparing the (rounded) total proceeds to the total face value. - 2. Compute the bond issue proceeds assuming a market interest rate of 7 percent. (Do not round until totaling the bond proceeds, at which point you should round the total bond proceeds to the nearest thousand dollars.) Also, express the bond issue price as a percentage by comparing the (rounded) total proceeds to the total face value.
- 3. Compute the bond issue proceeds assuming a market interest rate of 9 percent. (Do not round until totaling the bond proceeds, at which point you should round the total bond proceeds to the nearest thousand dollars.) Also, express the bond issue price as a percentage by comparing the (rounded) total proceeds to the total face value.
1.
To compute: The bond issue proceeds assuming a market interest rate of 8% and express it as a percentage by comparing the total proceeds to the total face value.
Answer to Problem 6E
The bond issue proceeds assuming a market interest rate of 8% is $1,999,993, and the total proceeds to the total face value is 100%.
Explanation of Solution
Compute the bond issue proceeds assuming a market interest rate of 8%.
Particulars | Amount ($) |
Face Value (1) | $2,000,000 |
Present value factor(2) | 0.46319 |
Present value of face amount(3) | $926,380 |
Face Value (1) | $2,000,000 |
Stated interest rate(4) | 0.08 |
Annual Interest Payment(5) | $160,000 |
Present value factor(6) | 6.71008 |
Present value of interest payments(7) | $1,073,613 |
Total Bond Proceeds(8) | $1,999,993 |
Table (1)
Therefore, the total bond proceeds, rounded to the nearest thousand is $2,000,000.
Working Notes:
Calculate the face value.
Calculate the present value factor.
Present value of $1 at 8% for 10 years is 0.46319 as per the Present Value Table.
(2)
Calculate the present value of face amount.
Calculate the stated interest rate.
Calculate the annual interest payment.
Calculate the present value factor.
Present value of $1 at 8% for 10 years is 6.71008 as per the Present Value of Annuity Table.
(6)
Calculate the present value of interest payments.
Calculate the total bond proceeds.
Compute the bond issue proceeds percentage by comparing the total proceeds to the total face value.
Calculate the total bond proceeds percentage.
Thus, the total bond proceeds percentage is 100%.
Therefore, the bond issue proceeds assuming a market interest rate of 8% is $1,999,993, and the total proceeds to the total face value is 100%.
2.
To compute: The bond issue proceeds assuming a market interest rate of 7% and express it as a percentage by comparing the total proceeds to the total face value.
Answer to Problem 6E
The bond issue proceeds assuming a market interest rate of 7% is $2,140,473, and the total proceeds to the total face value is 107%.
Explanation of Solution
Compute the bond issue proceeds assuming a market interest rate of 7%.
Particulars | Amount ($) |
Face Value (1) | $2,000,000 |
Present value factor (10) | 0.50835 |
Present value of face amount (11) | $1,016,700 |
Face Value (1) | $2,000,000 |
Stated interest rate (4) | 0.08 |
Annual Interest Payment (5) | $160,000 |
Present value factor (12) | 7.02358 |
Present value of interest payments (13) | $1,123,773 |
Total Bond Proceeds (14) | $2,140,473 |
Table (1)
Therefore, the total bond proceeds, rounded to the nearest thousand is $2,140,000.
Working Notes:
Calculate the present value factor.
Present value of $1 at 7% for 10 years is 0.50835 as per the Present Value Table.
(10)
Calculate the present value of face amount.
Calculate the present value factor.
Present value of $1 at 7% for 10 years is 7.02358 as per the Present Value of Annuity Table.
(12)
Calculate the present value of interest payments.
Calculate the total bond proceeds.
Compute the bond issue proceeds percentage by comparing the total proceeds to the total face value.
Calculate the total bond proceeds percentage.
Thus, the total bond proceeds percentage is 107%.
Therefore, the bond issue proceeds assuming a market interest rate of 7% is $2,140,473, and the total proceeds to the total face value is 107%.
3.
To compute: The bond issue proceeds assuming a market interest rate of 9% and express it as a percentage by comparing the total proceeds to the total face value.
Answer to Problem 6E
The bond issue proceeds assuming a market interest rate of 9% is $1,871,646, and the total proceeds to the total face value is 93.60%.
Explanation of Solution
Compute the bond issue proceeds assuming a market interest rate of 9%.
Particulars | Amount ($) |
Face Value (1) | $2,000,000 |
Present value factor (16) | 0.42241 |
Present value of face amount (17) | $844,820 |
Face Value (1) | $2,000,000 |
Stated interest rate (4) | 0.08 |
Annual Interest Payment (5) | $160,000 |
Present value factor (18) | 6.41766 |
Present value of interest payments (19) | $1,026,826 |
Total Bond Proceeds (20) | $1,871,646 |
Table (1)
Therefore, the total bond proceeds, rounded to the nearest thousand is $1,872,000.
Working Notes:
Calculate the present value factor.
Present value of $1 at 9% for 10 years is 0.42241 as per the Present Value Table.
(16)
Calculate the present value of face amount.
Calculate the present value factor.
Present value of $1 at 9% for 10 years is 6.41766 as per the Present Value of Annuity Table.
(18)
Calculate the present value of interest payments.
Calculate the total bond proceeds.
Compute the bond issue proceeds percentage by comparing the total proceeds to the total face value.
Calculate the total bond proceeds percentage.
Thus, the total bond proceeds percentage is 93.60%.
Therefore, the bond issue proceeds assuming a market interest rate of 9% is $1,871,646, and the total proceeds to the total face value is 93.60%.
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Chapter C Solutions
Fundamentals Of Financial Accounting
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