When the market rate of interest was 11%, Munson Corporation issued $1,000,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was
A) $1,052,310
B) $1,154,387
C) $1,000,000
D) $ 720,495

Question

Quizplus · Accepted Answer

To calculate the selling price of the bond, we need to use the present value of all future cash flows formula.

PMT = $60,000 (12% annual coupon/2 semiannual payments)
n = 16 (8 years * 2 payments per year)
i = 5.5% (11%/2) market interest rate per semiannual period

PV = PMT * [1 - 1/(1+i)^n] / i + FV / (1+i)^n

FV = $1,000,000 (the face value of the bond)

PV = $60,000 * [1 - 1/(1+0.055)^16] / 0.055 + $1,000,000 / (1+0.055)^16
PV = $526,155 + $526,155
PV = $1,052,310

Therefore, the selling price of the bond issue was $1,052,310. Answer choice A) is correct.

When the Market Rate of Interest Was 11%, Munson Corporation