White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 12 percent, what will be the issuance price of the bonds?

Question

Quizplus · Accepted Answer

To calculate the issuance price of the bonds we need to use the present value formula:

Present Value = (Interest Payment x Present Value Factor of an Annuity) + (Principal Payment x Present Value Factor of a Single Amount)

Where:
Interest Payment = Stated Rate x Principal = $200,000 x 10% = $20,000
Principal Payment = $200,000
Present Value Factor of an Annuity = [1 - (1 / (1 + r)n)] / r, where r is the market rate and n is the number of periods.
Present Value Factor of a Single Amount = 1 / (1 + r)n

Using the market rate of 12% and a 10-year term, we get:

Present Value Factor of an Annuity = [1 - (1 / (1 + 0.12)20)] / 0.12 = 6.3522
Present Value Factor of a Single Amount = 1 / (1 + 0.12)10 = 0.3220

Plugging these values into the formula we get:

Present Value = ($20,000 x 6.3522) + ($200,000 x 0.3220) = $127,044
Therefore, the issuance price of the bonds is $127,044. This is closest to option B, $177,059.

White Sox Corporation Issued $200,000 of 10-Year Bonds on January