Question

Guv-Mint Bales needs to raise $1,200,000,000 (1.2 Billion) in new debt to finance its survival. The debt will be priced at a yield to maturity of 6.48%. These will be 30 year bonds with a coupon rate set at 5% to be paid annually. The investment bankers are charging a flotation cost of 2.50%. Bonds will have a face value of $1,000 per bond. Compute the number of bonds to be issued and round to the second decimal place.

Answer 1

Answer : Calculation of Number of Bonds to be issued

Number of Bonds to be issued = Amount to be raised / Current Price of Bond after floatation cost

Calculation of Current Price of Bond :

It can be calculated using PV function of Excel

=PV(rate,nper,pmt,fv)

where

rate is the yield to maturity i.e 6.48%

nper is the number of years to maturity i.e 30

pmt is the coupon payment i.e 1000 * 5% = 50

fv is the face value 1000

=PV(6.48%,30,-50,-1000)

Current Bond Price is 806.33

Current Bond Price after Floatation cost = 806.33 * (1 - 0.025)

= 786.17

Number of Bonds to be issued = 1,200,000,000 / 786.17

= 1526383.66 Bonds