A 10-year $1,000 bond sells for $980, and the flotation costs are 2% of the par...

Question

Question

A 10-year $1,000 bond sells for $980, and the flotation costs are 2% of the par value. The coupon rate is 8%. Put in the valu

Answer 1

Answer #1

Coupon dollars (I) = par value * coupon rate = $1000 * 8% = $80.

FC = 2% of par value = 2% of $1000 = $20.

Term (n) = 10

Price (P) = $980

Net Proceeds = P - FC = $980 - $20 = $960.

r_d is calculated using RATE function in Excel :

nper = 10 (years to maturity)

pmt = 80 (annual coupon payment)

pv = -960 (Net proceeds)

fv = 1000 (face value receivable at maturity)

RATE is calculated to be 8.61%.

r_d = 8.61%

- A3 A 8.61% fc =RATE(10,80,-960,1000) D E B C 3 |

Answer 2

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