10 Question 4 (10 Marks) Suppose your company needs to raise $30 million and you

Question

10 Question 4 (10 Marks) Suppose your company needs to raise $30 million and you want to issue twenty-year bonds, with a face value of $1,000 each, for this purpose. Assume the required return on your bond issue will be 8% p a , and you are evaluating two issue alternatives: an 8% annual coupon bond and a zero coupon bond (the zero coupon bond is priced assuming coupons are normally annual). Your company's tax rate is 35%. a) Calculate the number of coupon bonds you would need to issue to raise the $30 million. (3 Marks) b) Calculate the number of zero coupon bonds you would need to issue. (3 Marks) c) Calculate the repayment at maturity if you issue the coupon bonds. (2 Marks) d) Calculate the repayment at maturity if you issue the zero coupon bonds. (2 Marks)

Explanation / Answer

IN other words when c% and i% are same FV nad BP is same

139535000

Amount to be raised = 30000000 FV 1000 term (n yr) 20 rate of return (i%) 8% Coupon rate 8% Coupon payment C Coupon rate*FV= 1000*8% = Bond Price (Bp)= C (1-[1/((1+I%)^n)]/I%) + FV/(1+i%)^n = 80 (1-[1/((1+8%)^20)]/8%) + 1000/(1+8%)^20 = 785 + 215 = 1000

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