Question

Leahy Corp. sells $300,000 of bonds to private investors. The bonds are due in five years, have a 6% coupon rate, and interest is paid semiannually. The bonds were sold to yield 4%.What proceeds does Leahy receive from the investors?a. $300,000b. $274,345c. $326,948d. $299,999e. None of the above

Answer 1

c. $326,948

Step-by-step explanation:

we must determine the market price of the bonds:

market price = PV of face value + PV of coupons

• PV of face value = $300,000 / (1 + 2%)¹⁰ = $246,104.49
• PV of coupons = $9,000 (coupons) x 8.9826 (PV annuity factor 2%, 10 periods) = $80,843.40

total market price = $326,947.89 ≈ $326,948

since the market rate is lower than the coupon rate, the bonds should be sold at a premium.