Downing Company issues $4,000,000, 6%, 5-year bonds dated January 1, 2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
A) $4,000,000
B) $4,173,195
C) $4,175,047
D) $4,173,847

Question

Downing Company issues $4,000,000, 6%, 5-year bonds dated January 1, 2014 on January 1, 2014. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 
A) $4,000,000 
B) $4,173,195 
C) $4,175,047 
D) $4,173,847

Quizplus · Accepted Answer

The first step is to calculate the semi-annual coupon payment:
Coupon payment = face value x coupon rate / 2
= $4,000,000 x 6% / 2
= $120,000
Then, we need to calculate the present value of the bond using the given information:
N = 5 x 2 = 10 (since there are semi-annual payments for 5 years)
I/Y = 2.5% (since the annual yield is 5% and there are semi-annual payments)
PMT = $120,000
FV = $4,000,000
Using a financial calculator, we get the present value to be $4,175,047. This is the proceeds from the bond issue, since it represents the amount of money that the company will receive from selling the bonds.

Downing Company Issues $4,000,000, 6%, 5-Year Bonds Dated January 1