Your company plans to issue bonds later in the upcoming year. But with the economic uncertainty...

Question:

Your company plans to issue bonds later in the upcoming year. But with the economic uncertainty and varied interest rates, it is not clear how much money the company will receive when the bonds are issued. The company is committed to issuing 2,800 bonds, each of which will have a face value of $1,000, a stated interest rate of 10 percent paid annually, and a period to maturity of 10 years.

Required:

Compute the bond issue proceeds assuming a market interest rate of 10 percent. Also, express the bond issue price as a percentage by comparing the total proceeds to the total face value.

Bond Issuance Price:

A bond's issuance price depends on the bond's interest rate in comparison to market rate of interest. If the bond's rate of interest is higher than the market, the bond will be issued at a premium since it is a more desirable investment instrument. In contrast, when the bond's interest rate is lower than the market rate, the bond will be issued at a discount. Finally, when the rates are equal, the bond will be issued at face value.

Answer and Explanation:

When the bond's stated rate of interest is equal to the market rate of interest, the bond will be issued at face value. Thus, the bond issue proceeds will equal $2,800,000 (2,800 x $1,000). This is equal to 100% of the total face value ($2,800,000 / $2,800,000)


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