Suppose you are attempting to raise $32,000 in the bond market. There are two types of...

Suppose you are attempting to raise $32,000 in the bond market. There are two types of bonds you can issue: a $10,000 12yr semi-annual coupon bond, and a $10,000 8yr semiannual coupon bond with a 3% annual coupon rate. Your investment banker recommends offering two 12yr bonds and one 8yr bond, each to be sold at the t=0 PV of cash flows. Assume the discount rate is .76% APR, semi-annual compounding. You may assume that the maturing funds associated with the 8yr bond sit idly for years 10,11, and 12. What is the appropriate coupon rate on the 12yr bond?

Solutions

Expert Solution

Issue price of 8 year bond= $ 11,735.41 as follows:

Given, total amount to be raised= $32,000

Therefore, issue price of 12 year bond= $(32000-11735.41)/2 = $10,132.29

Coupon rate to be offered for 12-year bond= 0.875557% as follows:

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Suppose that there are two types of workers in the labor market, type A (low skilled)...

Suppose that there are two types of workers in the labor market, type A (low skilled) and type B (high skilled). The market for type A is at equilibrium while the market for type B workers currently exhibits a surplus of workers. Discuss the effect of the introduction of a minimum wage in the market for type A workers on the quality of workers hired in the type A market and on the distribution of workers across the two markets...

Suppose that there are two types of workers in the labor market, type A (low skilled)...

Suppose the market demand and supply functions are Qd= 32,000-20P and Qs=30P+750. You have just graduated...

Suppose the market demand and supply functions are Qd= 32,000-20P and Qs=30P+750. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product. a. Determine the equilibrium price and quantity in this market. b. TC=5000+1000Q-12Q^2+0.08Q^3. Determine whether or not you should enter this market. c. Due to unforeseen delays, you don’t enter the market. However, a year later the market supply has changed to Qs=30P+1500. Are...

Suppose a large firm seeks to raise capital by issuing a bond at the beginning of...

Suppose a large firm seeks to raise capital by issuing a bond at the beginning of 2017 with a $5,000 face value and $250 coupon payments to be made at the end of 2017, 2018, 2019, and 2020. The corporation will also repay the principle amount of the bond back to investors at the end of 2020\. 1. What is the rate of interest that the firm is paying on its bonds? 2. If Moody’s decides to upgrade the firm’s...

Problem 13. Suppose there are two bonds you are considering Bond A Bond B Bond A...

Problem 13. Suppose there are two bonds you are considering Bond A Bond B Bond A Bond B Maturity (years) 20 30 Coupon rate (%) 12 8 Par value 1000 1000 (a) If both bonds had a required rate of return of 10%, what would the bonds' prices be? (b) Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par value). Based on results in part (a), would you consider...

Suppose there are two types of people in an insurance market, high and low risks. High...

Suppose there are two types of people in an insurance market, high and low risks. High risk people are sick 10% of the time and low risk people are sick 5% of the time. The probability any individual is high risk is 40%. Upon getting sick, an individual loses $10,000 in medical expenses. a) What are the actuarially fair premiums for the types? b) If the insurer cannot distinguish between the two types, but the two individuals know their types,...

Suppose Brenda's farm, which operates in a perfectly competitive market for soybeans, produces 32,000 bushels of...

Suppose Brenda's farm, which operates in a perfectly competitive market for soybeans, produces 32,000 bushels of soybeans and sells them at the going market price of $4.50 per bushel. The farm's marginal cost of the last bushel sold is $4.40. What would you advise Brenda to do to increase her profit? Question 22 options: Lower the price so that she could sell more... Increase production and continue to charge the same price... Raise the price without changing production ... Raise...

Assume that you have two types of customers in an insurance market.

Assume that you have two types of customers in an insurance market. Both types have the same utility function U(W) = W½ where W denotes wealth. The probability of a bad outcome is pA = ½ for type A customers and qB = ¼ for type B customers. Assume that the level of wealth in the bad outcome is 10000 and that the level of wealth in the good outcome is 50000.a) Derive the optimal insurance solution assuming that the...

There are two bonds in the market: Bond A is a coupon bond with a nominal...

There are two bonds in the market: Bond A is a coupon bond with a nominal value of $100, maturing in one year, with coupon of $5 paid every six months. Bond B is a six-month pure-discount bond which pays $100. Suppose that the annual interest rate is 5% compounded monthly. (a)What is the non-arbitrage price of the bonds? (b)Explain how to replicate a pure-discount bond maturing in one year, by using a combination of the bonds in the market.

Suppose you are considering buying a $2,000,000 face value of bond in the secondary market. The...

Suppose you are considering buying a $2,000,000 face value of bond in the secondary market. The bond was issued in 2016 and is due in 2036. It is now 2020. In 2016, the appropriate market interest rate to price the bond was 8%. This bond pays quarterly interest payments. Currently, other bonds with similar risk charateristics are being issued into the market with 12% coupons. How much would you be willing to pay for this bond? Please tell me the...

Subjects