Question

In: Finance

GroundPink Inc. needs $2.7 million to expand its business. To accomplish this, the firm plans to...

GroundPink Inc. needs $2.7 million to expand its business. To accomplish this, the firm plans to sell 20-year, $1,000 face value zero coupon bonds. The bonds will be priced to yield 6.25 percent with interest compounded semiannually. What is the minimum number of bonds the company must sell? Ignore all cost issues.

Solutions

Expert Solution

9,245

Working:

The question is based on the concept of present value of zero coupon bond. As it's name suggests , zero coupon bond does not pay any interest during the life.
It pays only redemption cash flows at the end of life.
Minimum number of bonds to be sold = Total fund required / Present value of one zero coupon bond
= $       2,700,000 / $ 292.04
=                    9,245
Working:
Present Value of zero coupon bond = Bond Face Value x Present Value of $ 1 to be reeived at the end of life
= $          1,000.00 x (1+0.03125)^-40
= $          1,000.00 x 0.292039
= $             292.04
Semi annual yield = 6.25%/2
= 0.03125
Semi annual life = 20*2
= 40

jeff jeffy answered 2 years ago
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