Stech Co. is issuing $6.5 million 12% bonds in a private placement on July 1, 2019. Each £1,000 bond pays interest semi-annually on December 31 and June 30 of each year. The bonds mature in ten years. At the time of issuance, the market interest rate for similar types of bonds was 8%. What is the expected selling price of the bonds?

Question

Quizplus · Accepted Answer

The bonds will sell at a premium because the coupon rate (12%) is higher than the market rate (8%). The expected selling price is calculated by discounting the bond's cash flows (interest payments and principal) at the market rate. The correct calculation results in a price of £8,266,764.

Stech Co Is Issuing $6