Question

Boorowa Pastoral Ltd plans to raise $2.2 million to purchase land the graze more merino sheep. It will issue bonds with a term to maturity of 10 years. The face value per bond will be $1,000 and the coupon rate will be 7.5% per annum, paid semi-annually. Similar corporate bonds are trading at a yield to maturity of 9% per annum, compounded semi-annually. It is expected that these new bonds will trade at this rate. If the total cost of the bond issue is 3.5%, how many bonds will Boorowa Pastoral need to issue?

Select one:

a. 2,438

b. 2,527

c. 2,526

d. 2,437

Answer 1

The Issue price of the Bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 7.50% x ½]	PMT	37.50
Market Interest Rate or Yield to maturity on the Bond [9.00% x ½]	1/Y	4.50
Maturity Period/Time to Maturity [10 Years x 2]	N	20
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $902.44.

Net proceeds per bond

Net proceeds per bond = Issue price x (1 – Issue cost)

= $902.44 x (1 – 0.0350)

= $870.85 per Bond

Number of Bonds to be issued to raise $2.20 Million

Number of Bonds to be issued to raise $2.20 Million = Amount raised / Net proceeds per Bond

= $2,200,000 / $870.85 per Bond

= 2,526 Bonds

Therefore, the Number of Bonds to be issued by Boorowa Pastoral Ltd is (c). 2,526