Suppose your company needs to raise $10 million to construct a a new manufacturing facility. You...

Question:

Suppose your company needs to raise $10 million to construct a a new manufacturing facility. You are the Treasurer and have recommended to the CFO that the company raise $10 million by selling 30-year, $1,000 par value bonds with a coupon rate of 6% (Risk premium 2% higher than the 30-year US Treasury's current yield).

Assuming the same facts as the previous question, however prior to issuance of the new bonds by the company inflation spikes and your investment bank calls to tell you investors will now require an 8% yield on the bonds. The bonds will now sell for a discount to par. The company needs to sell how many bonds in order to raise $10,000,000?

Bond:

Bond is a debt instrument which is used to raise funds for long periods in return of which the issuer or borrower pays a fixed amount of interest to the lender or the holder of the bond and the principal is repaid at the end of the bond period.

Answer and Explanation: 1

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First, we need to find the price of bond

Price = {eq}I(1-(1+r)^{-p})/r + F/(1+r)^p {/eq}

where

  • I = coupon = $1,000 * 0.06 = $60
  • r = interest rate...

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Government, Zero-Coupon & Floating-Rate Bonds

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Chapter 7 / Lesson 4
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Bonds are debts that investors can buy to be repaid at a designated interest rate. Explore examples of three different types of bonds commonly exchanged: Government, Municipal, zero-coupon, and floating-rate bonds.


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