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Selling bonds

Finance

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.)

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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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