Question

Bowiafruit is looking to expand its operations and wishes to raise $4,000,000 by issuing 30 year, 6% coupon, semi-annual bonds with a face value of $1,000. If their investment banks suggests the current marke return on such bonds is and they charge a 4 commission on the proceeds, how many bonds does Bowlafruit need to sell to meet its financing goal? 7,754 4,487 6.462 9,305 5,385

Answer 1

face Value of Bond = $1000

Semi-annual payment on Bond = $1000*6%*1/2

= $30

n = 30 years*2 = 60

Current Market return on such Bonds (YTM) = 8%

Semi-annual YTM = 8%/2

=4%

calculating the Selling Price of Bond:-

$Price = \frac{CouponPayment}{(1+YTM)^{1}}+\frac{CouponPayment}{(1+YTM)^{2}}+.....+\frac{CouponPayment}{(1+YTM)^{n}}+\frac{FaceValue}{(1+YTM)^{n}}$

$Price = \frac{30}{(1+0.04)^{1}}+\frac{30}{(1+0.04)^{2}}+.....+\frac{30}{(1+0.04)^{60}}+\frac{1000}{(1+0.04)^{60}}$

Price = $678.705 + $95.06

Price = $773.765

So, The Bond will be sold at $773.765

- Amount to be raised = $4000,000

Commission on procceds = 4%

Amount to be raised with commission = $4000,000/(1-4%)

= $4166,667

No of Bonds to be issued to raise the amount = $4166,667/$773.77

= 5385 shares

Option 5

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