Question

Selling bonds. Lunar Vacations needs to raise $6,300 for its new project​ (a golf course on the​ moon). Astro Investment Bank will sell the bond for a commission of 2.2%. The market yield is currently 7.3% on​ twenty-year semiannual bonds. If Lunar wants to issue a 6.4% semiannual coupon​ bond, how many bonds will it need to sell to raise the $6,300,000​? Assume that all bonds are issued at a par value of $1,000.

Answer 1

Current value of the Bond = Present value of the future Interest receipt + Present value of the maturity amount

Current price of the Bond =

A = semiannual coupon payment= $1000*6.4%*6/12 = $32

y = yield rate = 7.3% per annum or 3.65% per semiannum = 0.0365

n= number of total compounding period = 20 years*2 = 40

MV = Maturity value = $1000

hence current price or value of the Bond =

=>current price of the Bond=$906.10

Net amount need to rise =$6,300,000

Commission = 2.2%

Gross Amount need to rise = $6,300,000 / (1-2.2%) = $6441717.79.

Number of bonds to be issued = Gross Amount / price per bond =$6441717.79 / $906.10 = 7109 Bonds (Round off)