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LBJ Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 25.00...

LBJ Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 25.00 year maturities with a coupon rate of 7.46% APR with semi-annual coupon payments (assume a face value of $1,000 on the bond). The current market rate for similar bonds is 9.14% APR. The company hopes to raise $37.50 million with the new issue. Based on the current market rate, what will one of the new bonds sell for?

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Answer #1

Selling Price of the New Bond

Face Value = $1,000

Semi-annual Coupon Amount = $37.30 [$1,000 x 7.46% x ½]

Semi-annual Yield to Maturity = 4.57% [9.14% x ½]

Maturity Years = 50 Years [25 Years x 2]


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

= $37.30[PVIFA 4.57%, 50 Years] + $1,000[PVIF 4.57%, 50 Years]

= [$37.30 x 19.53907] + [$1,000 x 0.10706]

= $728.81 + $107.61

= $835.87

“Therefore, the new Bond is selling for $835.87”

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