On January 1,SOMA issued ten-year bonds with a face amount of $1,000,000 and a stated interest rate of 8 percent payable annually each January 1.The bonds were priced to yield 10 percent.The total issue price (rounded)of the bonds was

Question

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The total issue price of the bonds is calculated using the present value of the bond's future cash flows, which include the annual interest payments and the principal amount at maturity. The interest payments are $80,000 annually ($1,000,000 * 8%), and the principal amount is $1,000,000. Since the bonds were priced to yield 10%, we discount these cash flows at the 10% rate. The present value of the annual interest payments (an annuity) and the principal amount (a lump sum) at a 10% discount rate results in a total issue price closer to $880,000, which indicates the bonds were issued at a discount due to the higher market interest rate compared to the stated rate.

On January 1,SOMA Issued Ten-Year Bonds with a Face Amount