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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, 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%.

Instructions

As the controller of the company, determine the selling price of the bonds.



I know the answer, but I am trying to determine why the interest is calculated based on 11% and not the 10%? And I am trying to determine why we would use 5% and 30 years for the PV of the 2 million bond rather than 11% and 15 years? Wouldn't the 5% and 30 be only for interest payments?

Top Answer

Why the interest is calculated based on 11 % and not the 10 %? 10% is market interest rate, which is the yield at which you... View the full answer

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