4. Provide the rererence intormation Part 1-Q2: Dan is also considering whether

Question

4. Provide the rererence intormation Part 1-Q2: Dan is also considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM orn either bond issue will be 7.5 percent. The coupon bond would have a 7.5 percent coupon rate, and the coupon will be paid semi-annually. The company's tax rate is 35 percent. Either bond has the par value of $1,000. How many of the coupon bonds must East Coast Yachts issue to raise the $70 million How many of the zeroes must it issue? s percent. The coupon bond wercen. Ether bond has the par vauet the zeroes

Explanation / Answer

(a) Semi-Annual Coupon Paying Bond:

YTM = 7.5 % per annum, Coupon payment frequency = Twice a year or semi-annual payments, Coupon Rate = 7.5 % or 3.75 % per half-year.

Smi-Annual Coupon = 0.0375 x 1000 = $ 37.5 and Annual Coupon PMT = 37.5 x 2 = $ 75

Maturity = 20 years or 40 half-years and Par Value = $ 1000

As the coupon rate and the YTM are equal to each other it implies that the bond's selling price is equal to its par value or face value of $ 1000

Capital to be raised = $ 70 million

Price per bond = $ 1000

Number of bonds issued = 70 x 1000000 / 1000 = 70000

(b) Zero-Coupon Bond:

Par Value = $ 1000, YTM = 7.5 % and Maturity = 20 years. Annual Coupon PMT = $ 0 (becuase zero-coupon bond).

Let the price of the bond be $ K

Therefore, K = 1000 / (1.075)^(20) = $ 235.413 ~ $ 235.4 approximately,

Capital to be Raised = $ 70 x 1000000

Number of Bonds Issued = 70000000 / 235.4 = 297349.6 ~ 297350

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