Finance question about bonds and their values. Argus, Inc, is planning to issue

Question

Finance question about bonds and their values.

Argus, Inc, is planning to issue $70 million in bonds. The coupon rate will be 8 percent with coupon interest to he paid semiannually. The entire $70 million face value will be due in ten years. Current interest rates are: What rating must the bonds have to sell at face value? If the bonds are rated Ba, what price would they sell for per $ 100 of maturity value? Given your answer in b, what face value must he issued in Older to raise $60 million dollars in cash?

Explanation / Answer

1. If the bonds have to be sold at face value, the bond coupon rate should be the same as the interest rate of the rating assigned to the bond. In this case, the bond coupon rate is 8% semiannual payment. The current interest rate for rating Aaa is 8.0% and hence the rate of the bond should also be Aaa.

2. In order to find the price at which the bond will sell, the cashflows from the bond should be discounted at the interest rate of its ratings. The net present value should be calcuated and this value will represnt the selling price of the bond. In this case, the rating is Ba and interest rate is 10% which will be 5% semi-annual. The following table shows the NPV calculation:

Therefore, the bonds would sell at $87.54 per $100 of maturity value

3. In order to raise $60 million, the face value to be raised = (100 * 60 million) / 87.54 = $68.54 million

Year Details Cash Inflow PV factor Present Value 1 Semiannual interest payment 1 4 0.952380952 3.81 1 Semiannual interest payment 2 4 0.907029478 3.63 2 Semiannual interest payment 1 4 0.863837599 3.46 2 Semiannual interest payment 2 4 0.822702475 3.29 3 Semiannual interest payment 1 4 0.783526166 3.13 3 Semiannual interest payment 2 4 0.746215397 2.98 4 Semiannual interest payment 1 4 0.71068133 2.84 4 Semiannual interest payment 2 4 0.676839362 2.71 5 Semiannual interest payment 1 4 0.644608916 2.58 5 Semiannual interest payment 2 4 0.613913254 2.46 6 Semiannual interest payment 1 4 0.584679289 2.34 6 Semiannual interest payment 2 4 0.556837418 2.23 7 Semiannual interest payment 1 4 0.530321351 2.12 7 Semiannual interest payment 2 4 0.505067953 2.02 8 Semiannual interest payment 1 4 0.481017098 1.92 8 Semiannual interest payment 2 4 0.458111522 1.83 9 Semiannual interest payment 1 4 0.436296688 1.75 9 Semiannual interest payment 2 4 0.415520655 1.66 10 Semiannual interest payment 1 4 0.395733957 1.58 10 Semiannual interest payment 2 + Face value of bond paid at the end of the tenure 104 0.376889483 39.20 Net Present Value 87.54

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