Question

Caspian Sea Drinks needs to raise $26.00 million by issuing bonds. It plans to issue a 19.00 year semi-annual pay bond that has a coupon rate of 5.14%. The yield to maturity on the bond is expected to be 4.79%. How many bonds must Caspian Sea issue? (Note: Your answer may not be a whole number. In reality, a company would not issue part of a bond, so round to 0 decimals)

Answer 1

Coupon Rate = 5.14% paid Semi annually

Time to Maturity = 19 Years

Yield to Maturity = 4.79%

Amount Required to be raised = $ 26 Million

Assume Face value of bond = $1,000

Price of Bond = Present Value of all future expected Cashflows

Price of Bond = Present Value of all Coupon Payments and Redemption Amount

Price of Bond = [($1,000 * 5.14%)/2* PVAF((4.79/2)%, (19 * 2 Periods)] + [$1000 * PV((4.79/2)%,(19*2)period]

Price of Bond = [$ 51.4 * PVAF( 2.395%,38 periods)] + [$1,000 * PV(2.395%, 38 period)]

Price of Bond = [$ 51.4 * 24.7672] + [$1,000 * 0.4068]

Price of Bond = $ 1,237.0356 + $ 406.8249

Price of Bond = $ 1,679.86

Amount Required to be raised = $ 26 Million

Price of Bond = $ 1,679.86

No. of bonds to be issued = $ 26 Million/ $ 1,679.86

No. of bonds to be issued = 15,477.48 Bonds

If Face value is $100, No. of bonds to be issued = 154,774.8 Bonds