Moore Industries manufactures exercise equipment. Recently the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's exercise equipment. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing £3,000,000 of 11% bonds on March 1, 2018, due on March 1, 2033, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. What is the selling price of the bonds?

Question

Quizplus · Accepted Answer

The selling price of the bonds is calculated using the present value of the bond's future cash flows, which include the interest payments and the principal amount at maturity. Since the market interest rate (10%) is lower than the coupon rate (11%), the bonds will sell at a premium. The present value of the interest payments (annuity) and the principal amount (lump sum) at the market rate of interest gives the selling price of the bonds, which is £3,230,594 in this case.

Moore Industries Manufactures Exercise Equipment