Question

Lopez Information Systems management is planning to issue 10-year bonds. The going market yield for such bonds is 8.125 percent. Assume that coupon payments will be made semiannually. Management is trying to decide between issuing an 8 percent coupon bond or a zero coupon bond. Lopez needs to raise $1 million. What will be the price of an 8 percent coupon bond, and how many 8 percent coupon bonds will have to be issued? What will be the price of a zero coupon bond, and how many zero coupon bonds will have to be issued?

Answer 1

1)

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(8*1000/200)/(1 + 8.125/200)^k]     +   1000/(1 + 8.125/200)^10x2

k=1

Bond Price = 991.55

Number of bonds to be issued = capital to be raised/bond price

=1000000/991.55

=1008.522

2)

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(0*1000/200)/(1 + 8.125/200)^k]     +   1000/(1 + 8.125/200)^10x2

k=1

Bond Price = 450.94

Number of bonds to be issued = capital to be raised/bond price

=1000000/450.94=2217.5899