On January 2, 2019, Wine Corporation wishes to issue €3,000,000 (par value) of its 8%, 10-year bonds. The bonds pay interest annually on January 1. The current yield rate on such bonds is 10%. Using the interest factors below, compute the amount that Wine will realize from the sale (issuance) of the bonds.

Question

Quizplus · Accepted Answer

First, we need to determine the annual interest payments for each bond:
Annual interest payment = par value x coupon rate = €3,000,000 x 8% = €240,000

Next, we need to determine the price for each bond by using the current yield rate of 10%. We can use the interest factor for a 10-year bond at 10% from the table provided:
Interest factor = 6.1455

Price per bond = annual interest payment x interest factor + par value x interest factor
Price per bond = (€240,000 x 6.1455) + (€3,000,000 x 6.1455)
Price per bond = €1,469,670 + €18,468,161
Price per bond = €19,937,831

Finally, we can calculate the total amount that Wine will realize from the sale:
Total amount = number of bonds x price per bond
Total amount = (€3,000,000 / €1,000) x €19,937,831
Total amount = 3,000 x €19,937,831
Total amount = €59,813,493

Therefore, the best choice is B) €2,631,204.

On January 2, 2019, Wine Corporation Wishes to Issue €3,000,000