Question

Guv-Mint Bales needs to raise $2,200,000,000 (2.2 Billion) in new debt to finance its survival. The debt will be priced at a yield to maturity of 4.68%. These will be 25 year bonds with a coupon rate set at 3% to be paid annually. The investment bankers are charging a flotation cost of 2.20%. 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

Number of bonds to issue = amount to raise / net issue price

Net issue price = gross issue price * (1 - flotation cost %)

Gross issue price is calculated using PV function in Excel :

rate = 4.68% (YTM of bonds = market interest rate)

nper = 25 (Years remaining until maturity with 1 coupon payment each year)

pmt = 1000 * 3% (annual coupon payment = face value * coupon rate)

fv = 1000 (face value receivable on maturity)

PV is calculated to be $755.44

Net issue price = $755.44 * (1 - 2.20%) = $738.82

Number of bonds to issue = amount to raise / net issue price

Number of bonds to issue = $2,200,000,000 / $738.82

Number of bonds to issue = 2,977,730.28