Question

# LBJ Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 21.00...

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)

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”

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