Heller Company issues $950,000 of 12% bonds that pay interest semiannually and mature in 10 years.
What is the bonds' issue price assuming that the bonds' market interest rate is 10% per year?

Question

Quizplus · Accepted Answer

The issue price of the bonds can be calculated using the present value of the bond's future cash flows, which include the semiannual interest payments and the principal amount at maturity. Given a market interest rate of 10% per year (or 5% per semiannual period), and semiannual interest payments (12% annual rate, or 6% per semiannual period), the bond's issue price is calculated by discounting these cash flows back to their present value at the market rate. The correct answer, $1,068,391, reflects this calculation, indicating that the bonds were issued at a premium because the coupon rate (12%) is higher than the market interest rate (10%).

Heller Company Issues $950,000 of 12% Bonds That Pay Interest