Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12% per annum.The required market rate of return is 16% per annum.What is the issue price of the debentures (rounded to the nearest dollar)?
A) $6 926 387
B) $8 000 000
C) $9 177 614
D) $8 673 978

Question

Quizplus · Accepted Answer

To calculate the issue price of the debentures, we need to use the present value formula.

PV = PMT x [1 - (1 / (1 + r)^n)] / r

where PV is the present value, PMT is the coupon payment, r is the required rate of return, and n is the number of periods.

In this case, PMT = $8,000,000 x 12% / 2 = $480,000 
n = 5 x 2 = 10 
r = 16% / 2 = 8%

Using these values, we can calculate the present value of the debentures:

PV = $480,000 x [1 - (1 / (1 + 8%)^10)] / 8% 
PV = $6,926,387

Therefore, the issue price of the debentures is $6,926,387. Choice A is correct.

Pearl Ltd Issues $8 Million in 5-Year Debentures That Pay