Reed Corp sells 500000 of bonds to private investors The bon

Reed Corp. sells $500,000 of bonds to private investors. The bonds are due in five years, have an 6% coupon rate, and interest is paid semiannually. The bonds were sold to yield 4%.

What proceeds does Reed receive from the investors?

Solution

Reed Corp. receive $544,913 from the investors

Par Value             = $500,000

Coupon Amount = [ $500,000 x 6% ] / 2 = $15,000

Discounting Rate = 4% / 2 = 2%

Period                   = 5 Years x 2 = 10 Years

Proceeds from the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $15,000 x (PVIFA 2%, 10 Years) + $500,000 x (PVIF 2%, 10 Years)

= [ $15,000 x 8.982585 ] + [ $500,000 x 0.820348 ]

= $134,739 + 410,174

= $544,913