Question

Oriole Information Systems management is planning to issue 10-year bonds. The going market yield for such bonds is 9.300 percent. Assume that coupon payments will be made semiannually. Management is trying to decide between issuing an 9 percent coupon bond or a zero coupon bond. Oriole needs to raise $1 million.

What will be the price of an 9 percent coupon bond?

How many 9 percent coupon bonds would have to be issued?

What will be the price of a zero coupon bond?

How many zero coupon bonds will have to be issued?

Answer 1

(a)-The price of the 9 percent coupon rate bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 9.00% x ½]	PMT	45
Market Interest Rate or Yield to maturity on the Bond [9.30% x ½]	1/Y	4.65
Maturity Period/Time to Maturity [10 Years x 2]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $980.74.

“Hence, the price of the 9 percent coupon rate bond will be $980.74”

(b)-The number of 9 percent coupon bonds to be issued

The number of 9 percent coupon bonds to be issued = Amount raised / Price per bond

= $1,000,000 / $980.74 per bond

= 1,020 Bonds

(c)-The price of a zero-coupon bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 0.00% x ½]	PMT	0
Market Interest Rate or Yield to maturity on the Bond [9.30% x ½]	1/Y	4.65
Maturity Period/Time to Maturity [10 Years x 2]	N	20
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $402.92.

“Hence, the price of the Zero-coupon bond will be $402.92”

(d)-The number of zero-coupon bonds to be issued

The number of zero-coupon bonds to be issued = Amount raised / Price per bond

= $1,000,000 / $402.92 per bond

= 2,482 Bonds