(Computation of Bond Liability) George Hincapie Inc. manufactures cycling equipment. Recently the

QUESTION

(Computation of Bond Liability) George Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the in- creasing demand for the companys 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, 2014, due on March 1, 2029, 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 cont r oller of the compan y , determine the selling price of the bonds.
Value of bond = A*(1-(1+i)^-n)/i * (1+i) + FV/(1+i)^n A = 2000000 * 11% /2 = 110000 i = 10% /2 = 5% n = 2014 to 2029 = 15 * 2 = 30 FV = 2000000 Value of

ond OR selling price of the bond = 110000 *(1-(1+.05)^-30)/.05* (1+.05) + 2000000/(1+.05)^30 = 2238273

ANSWER:

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