Question

a. You own a 4-year, 5.1% annual coupon bond with $1,000 face value. If the yield to maturity is 6.9%, what percentage of the bond's value comes from the present value of coupon payments? Answer in percent, rounded to one decimal place.

b. Your company is undertaking a new investment opportunity and you would like to issue bonds to fund the project. Each bond will be a 5-year zero-coupon bond with a $1,000 face value. If the bonds are to yield 7.4%, how many of these bonds will the company need to issue today in order to raise $97 million? Round to the nearest whole number.

Answer 1

a)

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 6.9%

And n is the no of Compounding periods 4 years

Coupon 5.1%

=

= 173.138471526 + 708.2521105

= 881.563682576

% of PV of Coupon = 173.138471526 / 881.563682576

= 19.64%

b)

Value of ZCB = Face Value / (1+r)^n

r = 0.074

n = 5

= 1000 / (1+0.074)^5

= 699.81

No of Bonds to be issued = Capital to be raised / Value per Bond

= 97,000,000 / 699.81

= 138609.55 OR 138610 Bonds