Guv-Mint Bales needs to raise $200,000,000 (200 Million) in new debt to finance its survival. The debt will be priced at a yield to maturity of 8.64%.

Guv-Mint Bales needs to raise $200,000,000 (200 Million) in new debt to finance its survival. The debt will be priced at a yield to maturity of 8.64%. These will be 10 year bonds with a coupon rate set at 7% to be paid annually. The investment bankers are charging a flotation cost of 3.24%. Bonds will have a face value of $1,000 per bond. Compute the number of bonds to be issued and round to the second decimal place.

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Expert Solution

Calculation of current price of bond:

Face Value = $1,000

Annual Coupon Rate = 7.00%

Annual Coupon = 7.00% * $1,000

Annual Coupon = $70

Time to Maturity = 10 years
Annual YTM = 8.64%

Current Price = $70 * PVIFA(8.64%, 10) + $1,000 * PVIF(8.64%, 10)
Current Price = $70 * (1 - (1/1.0864)^10) / 0.0864 + $1,000 * (1/1.0864)^10
Current Price = $70 * 6.520616 + $1,000 * 0.436619
Current Price = $893.06

Calculation of number of bonds to be issued:

Net Issue Price = Current Price * (1 - Flotation Cost)
Net Issue Price = $893.06 * (1 - 0.0324)
Net Issue Price = $864.125

Number of Bonds to be Issued = Amount to be Raised / Net Issue Price
Number of Bonds to be Issued = $200,000,000 / $864.125
Number of Bonds to be Issued = 231,448

Number of Bonds to be Issued = 231,448

Nabeel answered 1 year ago

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