Question 8 (6 marks) Powerful Chemicals Inc., an industrial company in the USA,

Question

Question 8 (6 marks) Powerful Chemicals Inc., an industrial company in the USA, decides to issue 20-year bonds with a face value of $1000 and semi-annual coupon payments. The effective annual rate or yield on other commercial and industrial bonds of similar risk and time to maturity is 7.25%, so the company decides to offer 8% annual coupon to attract investors. What would be a fair price for these bonds? Show all workings. Firstly we need to calculate the MIR (Market interest rate) for 6 months MIR for 6 months (1.0725-0.5)-1 :: 3.56% Semi-annual coupon will be $80/2 $40 Vb CPN (11-(1 +)/i)FV/ (1 + i) $40 (11 1.035640 0.0356 $1000(1.035640) $40[0.753215)/ 00356 + $246.785 $1093.09

Explanation / Answer

Answer:

For 1 year the MIR would have been raised to (1.0725)^1) - 1

Since it is 6 months half of year 1 1*1/2 = 0.5

So raised to power 0.5

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