In: Finance
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?
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: