Hincapie 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 $2,000,000 of 11% term corporate bonds on March 1, 2020, due on March 1, 2035, 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?

Question

Dawn

Business

1 May, 19:21

Hincapie 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 $2,000,000 of 11% term corporate bonds on March 1, 2020, due on March 1, 2035, 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?

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Lane Blake · Answer 1

Answer: The selling price is $2169753.71

Explanation:

The Present value of corporate bond may be regarded as the selling price of the bond, To calculate the selling price we simply need to calculate present value.

Face Value = $2000 000

Coupon payments = 2000 000 x 11/100 = 220 000/2 = 110 000 per 6 months

Market interest Rate = 10%

Effective interest rate = 0.10/2 = 0.05

Period = 2020 - 2035 = 15 years

Effective period = 12 x 2 = 30

Present Value = Face Value / (1 + r) ^ (n x 2) + P (1 - (1 + r) ^-n) / r

= 2000 000 / (1 + 0.10) ^15 + 110 000 (1 - (1 + 0.05) ^30) / 0.05

= 478784.09874 + 1690969.613

Present Value = 2169753.7117

The selling price is $2169753.71