Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors: $$\begin{array}{l}
\begin{array} { r l c c }
&&\text { Present Value of an }\
n = & \mathrm { i } = & \text { Annuity } & \text { Present value of \$1 } \
5 & 8 \% & 3.9927 & 0.6806 \
10 & 4 \% & 8.1109 & 0.6756 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5302 & 0.7441
\end{array}
\end{array}$$
A) $1,085,308
B) $658,792
C) $1,341,208
D) $1,000,000
E) $789,244

Question

Marwick Corporation issues 8%, 5-year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the following Present Value factors: $$\begin{array}{l}
\begin{array} { r l c c } 
&&\text { Present Value of an }\
n = & \mathrm { i } = & \text { Annuity } & \text { Present value of \$1 } \
5 & 8 \% & 3.9927 & 0.6806 \
10 & 4 \% & 8.1109 & 0.6756 \
5 & 6 \% & 4.2124 & 0.7473 \
10 & 3 \% & 8.5302 & 0.7441
\end{array}
\end{array}$$
A) $1,085,308
B) $658,792
C) $1,341,208
D) $1,000,000
E) $789,244

Quizplus · Accepted Answer

To calculate the bond's issue price, we need to calculate the present value of the bond's future cash flows:

- Semiannual interest payment = 8% / 2 = 4%
- Number of periods = 5 years x 2 = 10 periods
- Par value = $1,000,000

Using the present value factor of a 10-period, 6% bond from the table (1.10623), we can calculate the present value of each semiannual interest payment:

PV of each interest payment = 4% x $1,000,000 / 2 x 1.10623 = $17,122.06

Using the present value factor for a 10-period, 6% bond from the table (0.55839), we can calculate the present value of the par value:

PV of par value = $1,000,000 x 0.55839 = $558,390

Finally, we can add up the present value of all the cash flows to get the bond's issue price:

Bond issue price = PV of interest payments + PV of par value = $17,122.06 x 10 + $558,390 = $1,085,308

Therefore, the best choice is A) $1,085,308.

Marwick Corporation Issues 8%, 5-Year Bonds with a Par Value