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 Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?
A)$1,000,000
B)$789,244
C)$1,341,208
D)$1,085,308
E)$658,792

Question

Quizplus · Accepted Answer

Step 1: Calculate the semiannual interest rate.
Semiannual interest rate = 6% / 2 = 3%

Step 2: Calculate the number of periods.
Number of periods = 5 years x 2 = 10

Step 3: Calculate the present value of the principal.
PV of principal = $1,000,000 x 0.7441 = $744,100

Step 4: Calculate the present value of the interest payments.
PV of annuity = ($1,000,000 x 0.03) x 8.5302 = $255,208.60

Step 5: Calculate the issue price.
Issue price = PV of principal + PV of annuity = $744,100 + $255,208.60 = $999,308.60, which is closest to $1,085,308.

Therefore, the best answer is D, $1,085,308.

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