Question

Caspian Sea Drinks needs to raise $40.00 million by issuing bonds. It plans to issue a 12.00 year semi-annual pay bond that has a coupon rate of 5.16%. The yield to maturity on the bond is expected to be 4.86%. How many bonds must Caspian Sea issue? (Note: Your answer may not be a whole number. In reality, a company would not issue part of a bond.)

Answer 1

The number of bonds is computed as shown below:

The value of the bond is computed as shown below:

The coupon payment is computed as follows:

= 5.16% / 2 x $ 1,000 (Since the payments are semi annually, hence divided by 2)

= $ 25.8

The YTM will be as follows:

= 4.86% / 2 (Since the payments are semi annually, hence divided by 2)

= 2.43% or 0.0243

N will be as follows:

= 12 x 2 (Since the payments are semi annually, hence multiplied by 2)

= 24

So, the price of the bond is computed as follows:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

= $ 25.8 x [ [ (1 - 1 / (1 + 0.0243)²⁴ ] / 0.0243 ] + $ 1,000 / 1.0243²⁴

= $ 25.8 x 18.02407685 + $ 562.0149326

= $ 1,027.036115

So, the number of bonds needed to raise $ 40 million will be as follows:

= $ 40,000,000 / $ 1,027.036115

= 38,947.02379

Feel free to ask in case of any query relating to this question