Question

6. Company XYZ is considering issuing 10-year corporate bonds. The face value is $1,000 and coupon rate is 5.5% paid semi-annually. If investors’ required return on similar corporate bonds is 8%, how many does XYZ need to issue in order to raise $2,000,000 (assuming no fees or any issuing costs). (10 points)

Answer 1

Price of bond = Coupen Amount * Present value annuity factor ( peroidic rate, number of periods ) + Face Value * Present value interest factor ( peroidic rate, number of periods )

                   = ( 1000 * 5.5% * 6/12 ) * PVAF ( 8%/2, 10 years * 2 ) + 1000 * PVIF ( 8%/2, 10 years * 2 )

                   = ( 27.50 ) * PVAF ( 4%, 20 ) + 1000 * PVIF ( 4%, 20 )

                   = 27.50 * [ 1/1.04 + 1/1.04² + 1/1.04³ + ..... + 1/1.04²⁰ ] + 1000 * 1/1.04²⁰

                   = 27.50 * 13.5903 + 1000 * 0.4564

                   = 373.74 + 456.40

                   = 830.14

Number of bonds to issue = 2,000,000 / 830.14

                                     = 2410 bonds Answer