Park Corporation issued 10-year bonds with a face value of $10,000,000. The face rate of interest on the bonds was 8%, and Park agreed to make semiannual payments. The market rate of interest at the time the bonds were issued was 6%. How much cash did Park Corporation receive from the issuance of the bonds

Question

Rosa Joyce

Business

2 July, 20:27

Park Corporation issued 10-year bonds with a face value of $10,000,000. The face rate of interest on the bonds was 8%, and Park agreed to make semiannual payments. The market rate of interest at the time the bonds were issued was 6%. How much cash did Park Corporation receive from the issuance of the bonds

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Answers (1)

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Dario Weiss · Answer 1

Answer: $11,487,747

Explanation:

When companies need to raise money, bonds issuance is one way to do it. A bond acts as a loan between an investor and a corporation. The investor comes in agreement to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. The investor's loan is repaid when the loan reaches its maturity date.

The issue price of a bond is based on the link between the interest rate that the bond pays and the market interest rate being paid on the same date.

Issue price of bonds = Present value of interest+Present value of maturity

= (10000000*4%*14.8775) + (10000000*0.5537)

Issue price of bonds = 11487747

So answer is $11487747