A corporation issues for cash $8,000,000 of 8%, 25-year bonds, interest payable semiannually. The amount received for the bonds will be
A) present value of 50 semiannual interest payments of $320,000, plus present value of $8,000,000 to be repaid in 25 years
B) present value of 25 annual interest payments of $640,000
C) present value of 25 annual interest payments of $640,000, plus present value of $8,000,000 to be repaid in 25 years
D) present value of $8,000,000 to be repaid in 25 years, less present value of 50 semiannual interest payments of $320,000

Question

Quizplus · Accepted Answer

The amount received for the bonds will be the present value of 50 semiannual interest payments of $320,000 plus the present value of the $8,000,000 to be repaid in 25 years. This is because the bondholders are paying for the present value of future cash flows, which includes the interest payments and the principal repayment at the end of the 25 years. Therefore, option A is the correct choice. Option B is incorrect because the bonds pay interest semiannually, not annually. Option C is incorrect because it assumes annual interest payments instead of semiannual interest payments. Option D is incorrect because it subtracts the present value of the interest payments from the principal repayment, which is not how bond pricing works.

A Corporation Issues for Cash $8,000,000 of 8%, 25-Year Bonds