Hard Spun Industries (HSI) has a project that it expects will produce a cash flo

Question

Hard Spun Industries (HSI) has a project that it expects will produce a cash flow of $3.1 million in 11 years. To finance the project, the company needs to borrow $2.3 million today. The project will also produce intermediate cash flows of $230,000 per year that HSI can use to service coupon payments of $115,000 every six months. Based on the risk of this investment, market participants will require a 9.5% yield. If HSI wishes a maturity of 11 years (matching the arrival of the lump sum cash flow), what does the face value of the bond have to be? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis.

Explanation / Answer

Coupon payment = 115,000 semi-annually
PV= Present Value = 2,300,000
FV= Future Value = 3,100,000
Time to maturity = 11*2 =22 (multiplied by 2 since it is compounded semiannually)

Using these values to calculate I in financial calculator, we get I= 5.82%
Note that this interest rate is semiannual

Annualized interest rate (YTM) = (1+5.82%)^2-1
= 11.98%

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