Question

Colmo Corporation wants to raise $8.0 million to expand its business. To accomplish this, it plans to sell 15-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 7.0 percent, with semiannual compounding. What is the minimum number of bonds the firm must sell to raise the $8.0 million it needs?

21,907

25,236

20,703

22,454

20,328

Answer 1

The minimum number of bonds is computed as shown below:

The value of 1 zero coupon bond is computed as follows:

= Par value / (1 + r)n

r is computed as follows:

= 7% / 2 (Since interest is compounded semi annually, hence divided by 2)

= 3.5% or 0.035

n is computed as follows:

= 15 x 2

= 30

So, the value of the bond is

= $ 1,000 / 1.03530

= $ 356.2784106

So, the minimum number of bonds to raise $ 8 million will be as follows:

= $ 8,000,000 / $ 356.2784106

= 22,454 Approximately

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