Reed Corp. sells $500,000 of bonds to private investors. The bonds are due in five years, have a 6% coupon rate, and interest is paid semiannually. The bonds were sold to yield 4%.
What proceeds does Reed receive from the investors?

Question

Quizplus · Accepted Answer

The correct answer is A.The proceeds from the sale of the bonds can be calculated using the following formula:Proceeds = Present value of the bond payments + Present value of the face valueThe present value of the bond payments can be calculated using the following formula:Present value of bond payments = (Coupon payment / Yield) * [1 - (1 + Yield/2)^(-2*Number of periods)]In this case, the coupon payment is $500,000 * 6% / 2 = $15,000, the yield is 4% / 2 = 2%, and the number of periods is 5 * 2 = 10.Plugging these values into the formula, we get:Present value of bond payments = (15,000 / 0.02) * [1 - (1 + 0.02/2)^(-2*10)] = $474,345The present value of the face value can be calculated using the following formula:Present value of face value = Face value / (1 + Yield/2)^Number of periodsIn this case, the face value is $500,000, the yield is 4% / 2 = 2%, and the number of periods is 5 * 2 = 10.Plugging these values into the formula, we get:Present value of face value = 500,000 / (1 + 0.02/2)^10 = $474,345Therefore, the proceeds from the sale of the bonds are $474,345 + $474,345 = $544,913.

Reed Corp Sells $500,000 of Bonds to Private Investors