Question

Cullumber Company is issuing eight-year bonds with a coupon rate of 6.2 percent and semiannual coupon payments. If the current market rate for similar bonds is 9 percent. A) What will the bond price be? B) If company management wants to raise $1.25 million, how many bonds does the firm have to sell?

Answer 1

(a)The market 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 6.20% x ½]	PMT	31
Market Interest Rate or Yield to maturity on the Bond [9.00% x ½]	1/Y	4.50
Maturity Period/Time to Maturity [8 Years x 2]	N	16
Bond Price	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) = $842.72.

“Hence, the Price of the Bond will be $842.72”

(b)-The number of Bonds to be issued to raise $1.25 Million

The number of Bonds to be issued to raise $1.25 Million = Amount raised / Market rate per Bond

= $1,250,000 / $842.72 per Bond

= 1,483.29 Bonds

= 1,483 Bonds (Rounded to nearest whole number)