Answer:
Present value of the bond issuance = $20,131,446.33
Explanation:
The value of a bond is the sum of the of the cash inflows generated by the bond over its life span discounted at the required rate of return. The required rate of return represents opportunity cost of investing the bond; and it is given as 14% in this question.
The cash inflows are the interest payments and the redemption value.
The present value of these two cash inflows would be computed and added.
Time to maturity = 2 years
Semi-coupon rate = 14% * $12 m × 1/2 =.$1,400,000
Present Value(PV) of Interest payment
Time to maturity = 2 years
Interest payment per 6 months = 14% * $12 m × 1/2 =.$1,400,000
PV =1,400,000 × (1-(1.007)^(-4) - 1)/0.07
= 1,400,000 × 3.3872
= $4,742,095.76
Present Value of redemption value
= 20,000,000 × (1.14)^(-2)
= $15,389,350.57
Present value of the bond issuance
=$4,742,095.76 + $15,389,350.57
= $20,131,446.33
Present value of the bond issuance = $20,131,446.33
