Kiss Greetings planned to raise $500,000 by issuing bonds.The bond certificates were printed bearing a stated interest rate of 6%,which was equal to the yield rate of interest.However,before the bonds could be issued,economic conditions forced the yield rate up to 7%.If the life of the bonds is 10 years and interest is paid annually on December 31,how much will the company receive from the sale of the bonds?

Question

Quizplus · Accepted Answer

Since the yield rate has increased from 6% to 7%, the bonds become less attractive to investors because they can earn a higher return elsewhere. This means Kiss Greetings will have to offer a discount on the bond price in order to entice investors. The amount of the discount will depend on the difference between the stated interest rate and the yield rate.

Using the formula for present value of a bond:

PV = (C / r) x (1 - (1 + r)^-n)

where: 
C = annual interest payment 
r = yield rate 
n = number of periods

we can calculate the present value of the bond.

PV = (50,000 / 0.07) x (1 - (1 + 0.07)^-10) 
PV = $342,376

This means that the company will receive $342,376 from the sale of the bonds, which is less than the $500,000 they had hoped to raise. Therefore, the correct answer is B.

Kiss Greetings Planned to Raise $500,000 by Issuing Bonds