Question

LBJ Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 23.00 year maturities with a coupon rate of 7.38% APR with semi-annual coupon payments (assume a face value of $1,000 on the bond). The current market rate for similar bonds is 9.92% APR. The company hopes to raise $35.50 million with the new issue. Based on the current market rate, what will one of the new bonds sell for?

Answer #1

Semiannual interest = 1000*.0738*6/12= 36.90

semiannual months = 23 *2 =46

semiannual yield = 9.92 *6/12 = 4.96%

Price of a bond =[PVA 4.96%,46* interest ] +[PVF 4.96%,46 * Face value]

= [17.98647*36.90]+[.10787*1000]

= 663.70+ 107.87

= $ 771.57

**find present value factor and present value annuity factor from table or using financial calculator where i =4.96% and n= 46

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