Sharmer Company issues 5%,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 factors:
A)$957,355
B)$1,000,000
C)$1,250,000
D)$786,745
E)$1,213,255

Question

Sharmer Company issues 5%,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 factors: 
A)$957,355 
B)$1,000,000 
C)$1,250,000 
D)$786,745 
E)$1,213,255

Quizplus · Accepted Answer

To calculate the issue price of the bond, we need to use the present value of an annuity formula. The semiannual interest payment would be $25,000 ($1,000,000 x 5% x 6/12), and there would be 10 semiannual payments over 5 years. The market rate is 6%, which means the semiannual rate would be 3%. Plugging in these values into the formula, we get:

PV = ($25,000 x (1 - 1/(1 + 0.03)^10)) / 0.03 + ($1,000,000 / (1 + 0.03)^10)
PV = $957,355

Therefore, the bond's issue price is $957,355, which is option A.

Sharmer Company Issues 5%,5-Year Bonds with a Par Value of $1,000,000