Question

Crane, Inc., management wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. The company’s investment banker states that investors would use an 9.1 percent discount rate to value such bonds. Assume semiannual coupon payments.

At what price would these bonds sell in the marketplace? (Round answer to 2 decimal places, e.g. 15.25)

Market rate

$

How many bonds would the firm have to issue to raise $1 million? (Round answer to 0 decimal places, e.g. 5,275.)

Number of bonds

Answer 1

price of coupon = par value/(1+i)^n

i = interest rate per period

n = number of periods

a)

Price = 1000/(1+0.091/2)^12

= 586.29

b)

number of bonds = 1000000/586.29

= 1705.64

= 1706 bonds