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, 2020, due on March 1, 2035, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%What is the selling price of the bonds?

The Present value of corporate bond may be regarded as the selling price of the bond,To calculate the selling price we simply need to calculate present value.

Face Value = $2000 000

Coupon payments = 2000 000 x 11/100 = 220 000/2 = 110 000 per 6 months

Market interest Rate = 10%

Effective interest rate = 0.10/2 = 0.05

Period = 2020 - 2035 = 15 years

Effective period = 12 x 2 = 30

Present Value = Face Value/(1 + r)^(n x 2) + P(1 - (1 + r)^-n)/r

= 2000 000/(1 + 0.10)^15 + 110 000(1 - (1 + 0.05)^30)/0.05

= 478784.09874 + 1690969.613

Present Value = 2169753.7117

The selling price is $2169753.71

rowboatontario rowboatontario · Answer 2 · 2025-03-26T18:03:13-04:00

The selling price of the bonds of Hincapie Inc. manufactures is $2169753.71.

Selling Price of Market Bonds

In the following question we have been provided with the following information:

Face Value = $2,000,000

Market interest Rate = r = 10%

Time period = 2035 - 2020 = n = 15 years

We have to find the selling price. The Selling price is the Present Value of Corporate Bond.

The Formula for Present Value or Selling Price

= Face Value/(1 + r)^(n x 2) + Coupon Payment(1 - (1 + r)^-n)/r

Coupon payments = 2000 000 x 11/100 = 220000 in a year, which becomes 110000 per 6 months.

= 2000 000/(1 + 0.10)^15 + 110 000(1 - (1 + 0.05)^30)/0.05

Solving this equation we will get the value of $2169753.7117, and this is the selling price of bonds.

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