Question

Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. Instructions As the controller of the company, determine the selling price of the bonds

Short answer

The selling price of the bond will be $2,153,729.5

Step-by-step solution

Given Information

$\begin{array}{rcl}\mathrm{Bond}\mathrm{face}\mathrm{value}& =& \$2,000,000\\ \mathrm{Bond}\mathrm{interest}\mathrm{rate}& =& 11\%\\ \mathrm{Market}\mathrm{interest}\mathrm{rate}& =& 10\%\\ \mathrm{Bond}\mathrm{tenure}\mathrm{in}\mathrm{years}& =& 15\end{array}$

Computation of selling price of the bonds

$\begin{array}{rcl}\mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{the}\mathrm{bonds}& =& \mathrm{Par}\left(\mathrm{maturity}\right)\mathrm{value}+\mathrm{Interest}\left(\mathrm{Annuity}\right)\\ & =& 2,000,000\times 0.23138+110,000\times 15.37245\\ & =& 462,760+1,690,969.5\\ & =& \$2,153,729.5\end{array}$