Question

Caspian Sea Drinks needs to raise $21.00 million by issuing bonds. It plans to issue a 18.00 year semi-annual pay bond that has a coupon rate of 5.02%. The yield to maturity on the bond is expected to be 4.76%. 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

Answer-

Amount to be raised by issuing bonds = $ 21.0 million

Face value = par value = $ 1000
Coupon payments = PMT = 5.02 %  / 2 = 2.51 % = 0.0251 X $ 1000 = $ 25.1
Number of periods = N = 18 x 2 = 36
Yield to maturty = YTM = I/Y = 4.76 % / 2 = 2.38 %

[ All the calculations are based on semiannual period ]

Present value = market value = PV = ?

Present value = market value = PV = $ 1031.2

The number of bonds to be issued for raising $ 21.0 million = $ 21.0 m / $ 1031.2 = $ 21000000 / $ 1031.2 = $ 20364.62 bonds

Therefore Caspian Sea should issue 20364.62 bonds.