On January 1, 20A, A-Ace Corp. issued $3,000,000 par value 12%, 10 year bonds which pay interest each December 31. If the market rate of interest was 14%, what should the issue price of the bonds be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)
A) $2,686,896
B) $3,339,084
C) $2,843,172
D) $3,000,000

Question

Quizplus · Accepted Answer

The issue price of the bonds is calculated by finding the present value of the principal and the present value of the interest payments, both discounted at the market rate of 14%. The present value of the principal is $3,000,000 * 0.2697 = $809,100. The annual interest payment is $3,000,000 * 12% = $360,000. The present value of the annuity of interest payments is $360,000 * 5.2161 = $1,877,796. Adding these gives the issue price: $809,100 + $1,877,796 = $2,686,896.