Question

Kintel, 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 10.32 percent discount rate to value such bonds. Assume semiannual coupon payments.

At what price would these bonds sell in the marketplace? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and Bond price to 2 decimal places, e.g. 15.25)

Market rate

$

How many bonds would the firm have to issue to raise $1 million? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and number of bonds to 0 decimal places, e.g. 5,275.)

Number of bonds

Answer 1

Issue price of Zero Coupon bond= F/(1+r)^t

Where F= Face value (given as $1,000), r= rate of discount (given as 10.32% 0r, 0.1032) and t= number of times compounded.

Given, term of bond is 6 years and compounding frequency= semi annual

Therefore, number of compounding period= 6*2 = 12

Substituting these values,

Issue price per bond= 1000/(1+0.1032)^12 = 1000/1.1704 = 854.4087

Rounded to $ 854.41

Also given, total amount to be raised= $1,000,000

Therefore, number of bonds to be issued= 1,000,000/854.4087 = 1170.4001   Rounded to 1170