1.Rock Hill Brewery is planning to issue 10-year bonds. The current market yield
ID: 2758116 • Letter: 1
Question
1.Rock Hill Brewery is planning to issue 10-year bonds. The current market yield for such bonds is 8.125 percent. Assume that coupon payments are made semiannually. Management is trying to decide between issuing an 8 percent coupon bond or a zero coupon bond. Rock Hill Brewery needs to raise $1 million. Answer all the questions.
a. What will be the price of an 8 percent coupon bond?
b. How many 8 percent coupon bonds would have to be issued?
c. What will be the price of a zero coupon bonds?
d. How many zero coupon bonds will have to be issued?
Explanation / Answer
Suppose the face value of Bond is 1000 Annual Coupon Payment @8.125% 81.25 New Annual Coupon Payment @8% 80 Price of 8% coupon Bond =80/0.08125 Ans a Price of 8% coupon Bond 984.62 Ans b No of Bonds to be issued =1000000/984.62 1015.62 Rounded off 1016 Ans c This is a proble of CAGR CAGR =((FV/PV)^(1/n)) – 1 0.08 =((1000/PV)^(1/10))-1 PV 463.2 Price of the Zero Coupon Bond is 463.2 Ans d No of zero coupon bond to be issued =1000000/463.2 2158.895 Rounded off 2159
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.