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Starbucks wants to raise money for expanding its European business. It issues a 14,321, $1,000 principal...

Starbucks wants to raise money for expanding its European business. It issues a 14,321, $1,000 principal bonds. They promise to pay a 11.4% coupon, paid quarterly for 7 years. If the YTM is 2.1%, how much money did they raise?

a. $17.2 million

b. $13.4 million

c. $23.0 million

d. $18.5 million

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Answer #1

Given about Starbucks' bond,

Face value = $1000

coupon rate = 11.4% paid quarterly,

=> quarterly coupon payment = (11.4%/4) of 1000 = $28.50

years to maturity = 7 years

YTM = 2.1%

So, Price of the bond is calculated on financial calculator usinf following values:

FV = 1000

PMT = 28.5

N = 4*7 = 28

I/Y = 2.1/4 = 0.525

Compute for PV, we get PV = -1603.94

So, bond will sell at a price of $1603.94

Company is going to issue 14321 bonds, so total money raised = 1603.94*14321 = $23.0 million

Option c is correct.

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