Question

Suppose a firm wants to raise $12.7 million by issuing bonds. It plans to issue a bond with the following characteristics:

1. Coupon rate: 6% APR
2. Yield to maturity: 7.6% APR
3. Coupons paid out semi-annually
4. Matures 20 years away from today
5. Face Value = $1,000

   How many bonds does the firm need to issue? Round to 2^nd decimal point.

Answer 1

Information provided:

Face value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon rate= 6%/2= 3%

Coupon rate= 0.03*1,000= $30 per semi-annual period

Yield to maturity = 7.6%/2 = 3.8% per semi-annual period

The question is solved by first computing the current price of the bond.

The current price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 40

PMT= 30

I/Y= 3.8

Press the CPT key and PV to compute the present value.

Th value obtained is 836.83.

Therefore, the current price of the bond is $836.83.

The number of bonds that the firm must issue:

= $12,700,000 / $836.83.

= 15,176.32 15,177 bonds.

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