Jordan Corporation issued $300,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent.
If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds?

Question

Quizplus · Accepted Answer

The issue price of the bonds will be higher than their face value because the stated interest rate (8%) is higher than the market interest rate (6%) at the time of issuance. This means the bonds will be issued at a premium. To calculate the issue price, we need to discount the future cash flows (interest payments and the principal repayment) back to their present value using the market interest rate of 6%. The correct calculation involves using the present value formula for an annuity (to calculate the present value of the interest payments) and the present value formula for a single sum (to calculate the present value of the principal repayment). The sum of these two present values gives the total issue price of the bonds, which is $358,802 in this case.

Jordan Corporation Issued $300,000 of 15-Year Bonds on January 1