In: Accounting
ron Maiden became the first? heavy-metal band to sell bonds when it arranged a? $30 million deal in February 1999. The collateral on the bonds? (and source of cash flow for interest and principal? payments) consisted of future royalties from the? band's albums like? "The Number of the? Beast." Each bond in the issue had a face value of ?$1,000?, a term of 12 years and paid semiannual coupons at the rate of 7.5?%. The yield to maturity on the bond was 7.5?%. At what price did each of the bonds? sell?
Selling Price of the Each Bond = $1,000
Face Value of the bond = $1,000
Coupon Amount = [$1,000 x 7.50%] x ½ = $37.50
Yield to Maturity = 7.50% / 2 = 3.75% [Semiannual compounding]
Maturity Period = 12 Years x 2 = 24 Years [Semiannual compounding]
Selling Price of the Bond = Present Value of the Coupon Payments + Present Value of the Face Value
= $37.50[PVIFA 3.75%, 24 Years] + $1,000[PVIF 3.75%, 24 Years]
= [$37.50 x 15.64482411] + [$1,000 x 0.41331909]
= $ 586.68 + 413.32
= $1,000
- If the Yield To Maturity [YTM] of the Bond is equal to the Coupon rate of the bond, then the Selling price of the bond will be equal to the par Value or Face Value of the Bond
- If the Yield To Maturity [YTM] is greater than the coupon rate, then the selling price of the bond will be less than it’s par value, since the bonds are selling at discount
- If the Yield To Maturity [YTM] is less than the coupon rate, then the selling price of the bond will be more than it’s par value, since the bonds are selling at premium.