On January 2, 2014, Wine Corporation wishes to issue $4,000,000 (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.
A) $4,000,000
B) $3,508,272
C) $4,000,024
D) $4,424,104

Question

On January 2, 2014, Wine Corporation wishes to issue $4,000,000 (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. 
A) $4,000,000 
B) $3,508,272 
C) $4,000,024 
D) $4,424,104

Quizplus · Accepted Answer

To calculate the amount Wine will realize from the sale (issuance) of the bonds, we need to use the present value formula:

PV = PMT x (1 - 1/(1+i)^n) / i

where PV is the present value (what Wine will realize), PMT is the annual payment (interest) on the bond, i is the yield rate (10%), and n is the number of periods (10 years).

To find PMT, we need to multiply the par value ($4,000,000) by the annual interest rate (8%):

PMT = $4,000,000 x 8% = $320,000

Now we can plug in the values:

PV = $320,000 x (1 - 1/(1+10%)^10) / 10%

= $3,508,272.22

Therefore, the best choice is B, as Wine will realize $3,508,272 from the sale of the bonds.

On January 2, 2014, Wine Corporation Wishes to Issue $4,000,000