Glover Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Glover expect to receive from the sale of these bonds?
A) $2,768,338
B) $3,000,000
C) $3,243,315
D) $3,231,660

Question

Quizplus · Accepted Answer

The bonds are issued at a discount because the contract rate (8%) is lower than the market discount rate (10%). The present value of the bond's cash flows (interest and principal) at the market rate will be less than the face value, resulting in a price of $2,768,338.

Glover Company Is About to Issue $3,000,000 of 5-Year Bonds