Question

LBJ Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 21.00 year maturities with a coupon rate of 7.04% APR with semi-annual coupon payments (assume a face value of $1,000 on the bond). The current market rate for similar bonds is 8.96% APR. The company hopes to raise $36.00 million with the new issue. To raise the debt, how many bonds must the company issue? (round to two decimal places)

Answer 1

The number of bonds to be issued by the company to raise $36 Million

Face Value = $1,000

Semi-annual Coupon Amount = $35.20 [$1,000 x 7.04% x ½]

Semi-annual Yield to Maturity = 4.48% [8.96% x ½]

Maturity Years = 42 Years [21 Years x 2]

The Price of the Bond = Present Value of the Coupon payments + Present Value of Face Value

= $35.20[PVIFA 4.48%, 42 Years] + $1,000[PVIF 4.48%, 42 Years]

= [$35.20 x 18.77877] + [$1,000 x 0.15871]

= $661.01 + $158.71

= $819.72 per Bond

Therefore, the number of Bonds to be issued = Amount raised / The Price of the Bond

= $3,60,00,000 / $819.72 per Bond

= 43,917.23 Bonds

“Hence, the company must issue 43,917.23 Bonds to raise $36 Million”