Daubert, Inc., planned to issue and sell at par 10-year, $1,000 face value bonds

Question

Daubert, Inc., planned to issue and sell at par 10-year, $1,000 face value bonds totaling $400 million next month. The bonds have been printed with a 6% coupon rate. Since that printing, however, Moody's downgraded Daubert's bond rating from Aaa to Aa. This means the bonds will have to be offered to yield buyers 7.2%. How much less than it expected will Daubert collect when the bonds are issued? Ignore administrative costs and commissions. Assume bond coupons are paid semiannually. Round PVFA and PVF values in intermediate calculations to four decimal places. Do not round other intermediate calculations. Round the answer to the nearest dollar.

Explanation / Answer

We need to find the bond price when the yield = 7.2% using PV function on a calculator

N = 10 x 2 = 20, PMT = 6% x 1000 / 2 = 30, FV = 1000, I/Y = 7.2% / 2 = 3.6%

=> Compute PV = $915.49

No. of bonds to be issued = 400 million / 1000 = 400,000

Now, amount raised = 915.49 x 400,000 = $366,196,820

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