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Selling bonds
Selling bonds. Lunar Vacations needs to raise $5,900,000 for its new project (a golf course on the moon). Astro Investment Bank will sell the bond for a commission of 2.2%. The market yield is currently 7.4% on twenty-year semiannual bonds. If Lunar wants to issue a 6.3% semiannual coupon bond, how many bonds will it need to sell to raise the $5,900,000? Assume that all bonds are issued at a par value of $1,000. How many bonds will Lunar need to sell to raise the $5,900,000? (Round to the nearest whole number.)
Expert Solution
| Particulars | Cash flow | Discount factor | Discounted cash flow |
| present value Interest payments-Annuity (3.7%,40 periods) | $ 31.50 | 20.70803 | $ 652.30 |
| Present value of bond face amount -Present value (3.7%,40 periods) | $ 1,000.00 | 0.23380 | $ 233.80 |
| Bond price | $ 886.11 | ||
| Less: commission | $ (19.49) | ||
| Proceed from one bond -a | $ 866.62 | ||
| Required proceeds -b | $5,900,000.00 | ||
| Bonds to issue = b/a | 6,808.09 | ||
| Interest amount: | |||
| Face value | 1,000 | ||
| Coupon/stated Rate of interest | 6.300% | ||
| Frequency of payment(once in) | 6 months | ||
| Interest amount | 1000*0.063*6/12= | $ 31.50 | |
| Present value calculation: | |||
| yield to maturity/Effective rate | 7.40% | ||
| Effective interest per period(i) | 0.074*6/12= | 3.700% | |
| Number of periods: | |||
| Particulars | Amount | ||
| Number of interest payments in a year | 2 | ||
| Years to maturiy | 20.0 | ||
| Number of periods | 40 |
Answer is:
6,808
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