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Oriole, INC., Management wants to raise $1 million by issuing six-year zero coupon bonds with a...

Oriole, INC., Management wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. The comapn'ys investment banker states that investors would use an 9.0 percent discount rate to value such bonds. Assume semiannual coupon payments.

At what price would these bonds sell (Round 2 dec)

How many bonds would the firm have to issue to raise $1 million (round to 2 dec)

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Answer #1

(a)-Selling price of the Bond

Face Value of the Bond = $1,000

Semi-annual Yield to Maturity (YTM) = 4.50% [9.00% x ½]

Time to Maturity/Maturity Period (n) = 12 Years [6 Years x 2]

Therefore, the Selling price of the Zero-Coupon Bond = Par Value / (1 + YTM)n

= $1,000 / (1 + 0.0450)12

= $1,000 / (1.0450)12

= $1,000 / 1.695881433

= $589.66

(b)-The number of bonds to be issued to raise $1 Million

The number of bonds to be issued to raise $1 Million = Amount raised / Price of the Zero-coupon Bond

= $1,000,000 / $589.66 per Bond

= 1,695.89 Bonds

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