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Untitled Document21 - Inc. receives a premium (more cash...

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If instead, Lighting Process, Inc. issued its $10,000 bonds with a coupon rate of  12% when the market rate was 10%, the purchasers would be willing to pay  $11,246. Semi-annual interest payments of $600 are calculated using the coupon  interest rate of 12% ($10,000 × 12% × 6 / 12 ). The total cash paid to investors over  the life of the bonds is $22,000, $10,000 of principal at maturity and $12,000  ($600 × 20 periods) in interest throughout the life of the bonds. Lighting Process, 
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Unformatted text preview: Inc. receives a premium (more cash than the principal amount) from the purchasers. The purchasers are willing to pay more for the bonds because the purchasers will receive interest payments of $600 when the market interest payment on the bonds was only $500. Present Value of Bond Sold Above Market Interest Rate Cash Flows Present Value Factor Present Value Principal Payment $10,000 .3769 $3,769 Interest Payments 600 12.4622 7,477 Price of Bond $ 11,246...
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