Question

Guv-Mint Bales needs to raise $200,000,000 (200 Million) in new debt to finance its survival. The debt will be priced at a yield to maturity of 8.64%. These will be 10 year bonds with a coupon rate set at 7% to be paid annually. The investment bankers are charging a flotation cost of 3.24%. 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

r = yeild to maturity = 8.64%

n = 10 years

C = Coupon payment = $1,000 * 7% = $70

Face value = $1,000

Value of bond today = [C * [1 - (1+r)^-n] / r] + [Face value / (1+r)^n]

= [$70 * [1 - (1+8.64%)^-10] / 8.64%] + [$1,000 / (1+8.64%)^10]

= [$70 * 0.563381201 / 0.0864] + [$1,000 / 2.2903274]

= $456.443103 + $436.6188

= $893.061903

= $893.06

Amount to be raised = $200,000,000

Number of bonds to be issued = Amount to be raised / [Bonds Price * (1- Flotation cost)]

= $200,000,000 / [$893.06 * (1-3.24%)]

= $200,000,000 / $864.124856

= 231,448.036

Therefore, bonds to be issued is 231,448.04