On January 1 the Mayes Company issued 400000 of 6 6year bond

On January 1, the Mayes Company issued $400,000 of 6%, 6-year bonds when the market rate of interest was 8%. The bonds pay interest semiannually on June 30 and December 31. How much are the proceeds that Ryan will receive from the bond issue date?

Select one:

A. $360,032

B. $280,400

C. $362,460

D. $399,800

Solution

ANSWER = C) 362460

issued value = $400000

Interest rate = 6%

Period = 6 year

Bond payment = Semiannally, (n = 6 * 2 = 12 and interest rate = 6%/2 = 3%)

Interest payment = $400000 * 3% = 12000

Market rate of interest I/Y = 8%, 4% -semi-annual

Proceeds Ryan will receive on bond issue date = Issued amount * PVF (4%, 12) + Coupon payment * PVIFA (4%,12)

= $400000 * 0.6246 + 12000 * 9.385

= 249838.82 + 112620.88

= 362460

ANSWER = C) 362460

PVIFA (4%,12) = (1 - (1 + r)^-n) / r. = (1 - (1 + 0.04)^-12) / 0.04 = 9.385

PVIF (4%,12) =  1 / (1 +r) ^ n =  1 / (1 +0.04) ^ 12 = 0.6246