On January 1, 2014, Haley Co. issued ten-year bonds with a face amount of $4,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows: The total issue price of the bonds was

Question

On January 1, 2014, Haley Co. issued ten-year bonds with a face amount of $4,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. Present value factors are as follows:  The total issue price of the bonds was

Quizplus · Accepted Answer

To calculate the issue price of the bonds, we need to use the present value of an annuity formula. The formula is as follows:

Present Value of Annuity = PMT x [(1 - (1 / (1 + r)n)) / r]

Where:
PMT = Annual interest payment = Face amount of bonds x Stated interest rate
r = Discount rate
n = Number of periods (in this case, 10 years)

Using the values given in the problem, we get:

PMT = $4,000,000 x 8% = $320,000
r = 10%
n = 10

Present Value of Annuity = $320,000 x [(1 - (1 / (1 + 10%)^10)) / 10%] = $2,489,600

To get the issue price of the bonds, we add the present value of the annuity to the present value of the face amount of the bonds:

Issue Price = $2,489,600 + ($4,000,000 / 1.10^10) = $3,510,400

Therefore, the best choice is D.