Setrakian Industries needs to raise $94.8 million to fund a new project. The company will sell bonds that have a coupon rate of 5.98 percent paid semiannually and that mature in 15 years. The bonds will be sold at an initial YTM of 6.76 percent and have a par value of $2,000. How many bonds must be sold to raise the necessary funds?

Question

Business

Ashlynn Mahoney

17 March, 17:22

Setrakian Industries needs to raise $94.8 million to fund a new project. The company will sell bonds that have a coupon rate of 5.98 percent paid semiannually and that mature in 15 years. The bonds will be sold at an initial YTM of 6.76 percent and have a par value of $2,000. How many bonds must be sold to raise the necessary funds?

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Answers (1)

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Simeon Sweeney · Answer 1

Units of bonds to be sold = 51, 122.75 units

Explanation:

The price of a bond is the present value (PV) of the future cash inflows expected from the bond discounted using the yield to maturity.

The price of the bond can be calculated as follows:

Step 1

PV of interest payment

Interest payment = (5.98% * $2000) / 2

= $59.8

Semi annual yield = 6.76/2 = 3.38 %

PV of interest payment

= 59.8 * (1 - (1.0338) ^ (-15*2)) / 0.0338)

=$ 1116.5682

Step 2

PV of redemption value

= 2,000 * (1+0.0338) ^ (-15*2)

= 737.7923719

Step 3

Price of bond

=$ 1116.568 + 737.7923

=1854.360

Step 4

unit of bonds to be sold

= Amount to be raised / price of bond

=$94.8 million/1854.360

= 51, 122.75 units