The bond issuance price for Jason company if the market interest is 12% is $4,435,000 (C).
To calculate the bond issuance price, we have to know 2 things first:
From the casse, we know that:
Bond value = $5,000,000
T = 10 years
Coupon interest rate = 10%
Market interest rate = 12%
The present value factors table is attached below.
Present value of the bond maturity value can be calculated by multiplying the bond value with PV of $1 at the market interest rate:
Present value of the bond maturity value = ($5,000,000 x 0.322)
Present value of the bond maturity value = $1,610,000
Present value of the bond interest payments is calculated by multiplying the bond interest at its coupon rate with PV of $1 annuity at the market interest rate:
Present value of the bond interest payments = ($5,000,000 x 10%) x 5.65
Present value of the bond interest payments = $4,435,000
Focus that the 10% coupon rate is only used for calculating the interest payment of the bond. The present value factor used for calculating the issuance price of the bond refers to the 12% market interest rate data.
Next, we would add both present values to find the bond issue price:
Bond issue price = PV of the bond maturity value + PV of the bond interest payments
Bond issue price = $1,610,000 + $2,825,000
Bond issue price = $4,435,000
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Complete Question:
On january 1, 2022, jason company issued $5 million of 10-year bonds at a 10% coupon interest rate to be paid annually. the following present value factors have been provided:
(Refer to the table attached below)
Calculate the issuance price if the market rate of interest is 12%
a. $4,427,000
b. $4,477,500
c. $4,435,000
d. $5,000,000
