Valente Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 10%, payable semiannually. The discount rate for such securities is 8%. How much can Valente 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 will be sold at a premium because the contract rate (10%) is higher than the discount rate (8%). The present value of the bond's cash flows (interest payments and principal) at the discount rate will be higher than the face value, resulting in $3,243,315.

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