On January 1,2011,Nadir Company issued $1,000,000 of 6%,20-year bonds when the market rate of interest was 5%.The bonds pay interest annually on December 31.How much cash did Nadir receive when the bonds were sold?

Question

Quizplus · Accepted Answer

Nadir Company would have received more than the face value of the bonds because the coupon rate (6%) was higher than the market interest rate (5%) at the time of issuance. This means the bonds were issued at a premium. The exact amount can be calculated using the present value of an annuity formula for the interest payments and the present value formula for the principal amount, both discounted at the market rate of 5%. The correct calculation results in $1,124,622.60.

On January 1,2011,Nadir Company Issued $1,000,000 of 6%,20-Year Bonds When