A company needs to raise $10 million to finance an investment. How many bonds would the firm need to sell (ignoring transaction costs)? Assume the company decides to issue 10-year maturity bonds with a 5% coupon rate, paying coupons semi-annually. The yield to maturity is currently 4%.
My finance teacher gave us this problem and never went over it. Does anyone know the formula or what to do to find the answer to this problem.
With my online tool that shows calculation for price of non zero coupon bonds I get the following results
http://finance.thinkanddone.com/onli...lculation.html
Compounding = semi annually
Par Value = 1000
Coupon Rate = 0.025
Market Rate = 0.02
N = 20
Non Zero Bond Price Formula
Coupon Rate x Par Value x PVIFA(ytm%, n) + Par Value x PVIF(ytm%, n)
PVIFA Formula
PVIFA(ytm%, n) = [1 - v] / ytm%
v = 1 / (1 + ytm%)^n
PVIFA(ytm%, n) = [1 - { 1 / (1 + ytm%)^n }] / ytm%
PVIFA Calculation
v = 1 / (1+0.02)^20
v = 0.67297133310806
PVIFA(0.02, 20) = [1 - 0.67297133310806] / 0.02
PVIFA(0.02, 20) = 0.32702866689194 / 0.02
PVIFA(0.02, 20) = 16.351433344597
PVIF Formula
PVIF(ytm%, n) = 1 / (1 + ytm%)^n
PVIF Calculation
PVIF(0.02, 20) = 1 / (1+0.02)^20
PVIF(0.02, 20) = 1 / 1.4859473959784
PVIF(0.02, 20) = 0.67297133310806
Non Zero Bond Price Calculation
Price = 0.025 x 1000 x 16.351433344597 + 1000 x 0.67297133310806
Price = 408.78583361493 + 672.97133310806
Price = 1081.76
One could have used MS Excel PV function to find the price of the bond with the following formula
=PV(rate,nper,pmt,fv,type)
=PV(4%/2,10*2,1000*5%/2,1000,0)
Hi Wilmer
I was awaiting your reply
I am doing exactly what you just explained, I am just throwing in the details so someone who is not familiar with the formulas for finding the price of the bond can see the workout. It may seem confusing but what do you suggest?
Should I just show the formula for bond price and plug in the number without explaining what is going on?
Yes that was my intention for visitors to the bond price calculation page that went live today. I think you missed the link in my first post, here it is again http://finance.thinkanddone.com/onli...lculation.html
I can use your feedback on this one, if you think showing work for PVIFA and PVIF is redundant then I can remove that from the calculation shown and instead plug in the values in the bond price formula