Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling)price, assuming the following Present Value factors: $\begin{array}{rlll}
&&\text { Present Value of an }\
n=&i=&\text { Annuity }&\text { Present value of } \mathbb{\$1}\
5 & 8 \% & 3.9927 & 0.6806 \
10 & 4 \% & 8.1109 & 0.6756 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5307 & 0.7441
\end{array}$
A)$1,085,308
B)$658,792
C)$1,341,208
D)$1,000,000
E)$789,244

Question

Quizplus · Accepted Answer

The bond's issue price is calculated using the present value of the annuity of interest payments and the present value of the principal. The semiannual market rate is 3% (half of 6%), and there are 10 periods (5 years x 2). Using the present value factors for 10 periods at 3%, the calculation is: (Interest payment of $40,000 x 8.5307) + (Principal of $1,000,000 x 0.7441) = $1,085,308.

Marwick Corporation Issues 8%, 5-Year Bonds with a Par Value