Question

Ivanhoe, Inc., management wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. The company’s investment banker states that investors would use an 10.4 percent discount rate to value such bonds. Assume semiannual coupon payments.

At what price would these bonds sell in the marketplace? (Round answer to 2 decimal places, e.g. 15.25)

Market rate

$

How many bonds would the firm have to issue to raise $1 million? (Round answer to 0 decimal places, e.g. 5,275.)

Number of bonds

Answer 1

If it is the case of zero coupon bond, no interest need to be paid, only one payment is required after maturity.
Price of bond (Zero coupon bonds) = Maturity Amount / [(1+r)^n]
r = Interest rate
n = Number of years
Discount rate (Semi-annual) = (10.4% / 2) = 5.2%
Price of bond (Zero coupon bonds) = 1000/(1.052^12) = $544.2658

So, at $544.27 would these bonds sell in the marketplace. (Rounded to 2 decimal places)

So, the number of bonds = 1000000 / 544.27 = 1,837.32

So, the number of bonds would the firm have to issue to raise $1 million is 1,837 (Rounded to 0 decimal places)

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