Question

Caspian Sea Drinks needs to raise $21.00 million by issuing bonds. It plans to issue a 18.00 year semi-annual bond that has a coupon rate oof 5.20%. The yield to maturity on the bond is expected to be 4.83%. How many bonds must Caspian Sea issue? (Note: answer may not be a whole number, in reality a company would not issue part of a bond) ROUND TO 0 DECIMAL PLACES

Answer 1

The question is solved by first calculating the price of the bond.

Information provided:

Par value= future value= $1,000

Time= 18 years*2= 36 semi-annual periods

Coupon rate= 5.20%/2= 2.60% per semi-annual period

Coupon payment= 0.0260*1,000= $26

Yield to maturity= 4.83%/2= 2.42%

The price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator:

FV= 1,000

N= 36

PMT= 26

I/Y= 2.42

Press the CPT key and PV to compute the present value of the bond.

The value obtained is 1,042.93.

Therefore, the price of the bond is $1,042.93.

The number of bonds to be issued to raise $26 million:

= $21,000,000/ $1,042.93.

= 20,135.57 20,136 bonds.

Therefore, Caspian Sea needs to raise 20,136 bonds to raise $21 million.

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