Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at

Question

03-07-2021
Business

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Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at

Sagot :

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abdulmajeedabiodunac abdulmajeedabiodunac · Answer 1 · 2021-07-05T20:42:17-04:00

Answer:

At a premium to the face amount

Explanation:

The bond has a higher coupon rate compared to its market interest of 5%, hence, the bond would be issued at a premium, in other words, the proceeds from the bond issuance would be more than the face amount of $200,000 as shown below using a financial calculator bearing in mind that the calculator would be set to its default end mode before making the following inputs:

N=20(let us assume it has 20 years to maturity and pays a coupon annually)

PMT=12000 (annual coupon=face value*coupon rate=$200,000*6%=$12,000)

I/Y=5(market interest rate without the % sign)

FV=200000

CPT

PV=$224,924.42($24,924.42 premium)

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