Question

Sheridan Information Systems management is planning to issue 10-year bonds. The going market yield for such bonds is 8.140 percent. Assume that coupon payments will be made semiannually. Management is trying to decide between issuing an 8 percent coupon bond or a zero coupon bond. Sheridan needs to raise $1 million. SEMIANNUALLY

a. What will be the price of an 8 percent coupon bond?

b. How many 8 percent coupon bonds would have to be issued?

c. What will be the price of a zero coupon bond?

d. How many zero coupon bonds will have to be issued?

Answer 1

a

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(8*1000/200)/(1 + 8.14/200)^k]     +   1000/(1 + 8.14/200)^10x2

k=1

Bond Price = 990.55

b

Number of bonds = 1000000/990.55

=

1009.54

c

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(0*1000/200)/(1 + 8.14/200)^k]     +   1000/(1 + 8.14/200)^10x2

k=1

Bond Price = 450.29

d

Number of bonds = 1000000/450.29

=

2220.79