Question

Zhang Technologies is looking to issue $1,000 par value, 7% annual coupon rate, 12 year maturity public bonds for the first time. These bonds have been estimated to have the same riskiness as the currently outstanding bonds of i2 Technologies. The i2 bond information is as follows: Par value $1,000; Maturity 12 years; Current price $818.81; Coupon rate -6.5% paid semi-annually. What price would Zhang expect to receive for their bonds?

Please show the steps to finding the answer using a *Financial Calculator*! Thank you.

Answer 1

i2 Technologies:

Face value = $1,000
Current price = $818.81

Annual coupon rate = 6.50%
Semiannual coupon rate = 3.25%
Semiannual coupon = 3.25% * $1,000
Semiannual coupon = $32.50

Time to maturity = 12 years
Semiannual period = 24

Using financial calculator to calculate semiannual YTM:

N = 24
PV = -818.81
PMT = 32.50
FV = 1000

I = 4.50%

Semiannual YTM = 4.50%
Annual YTM = 2 * 4.50%
Annual YTM = 9.00%

Zhang Technologies:

Face value = $1,000
Annual YTM = 9.00%
Time to maturity = 12 years

Annual coupon rate = 7.00%
Annual coupon = 7.00% * $1,000
Annual coupon = $70

Using financial calculator to calculate current price:

I = 9.00%
N = 12
PMT = 70
FV = 1000

PV = -856.79

Current price = $856.79