Question

Forever Yours Insurance Company need to raise $32,000,000. They decide to do so through the issuance of consol bonds. Each bond will have an annual coupon of $580. Given the current 6.60% yield to maturity on the firm’s bonds, how many bonds must the firm issue?

Answer 1

Forever Yours have to sell 3,642 bonds to raise $32million.

Step-by-step explanation:

A consol is a bond with no maturity date. The coupon payments thus represent a perpetual income stream. The present value of a perpetuity is calculated as follows:

`PresentValue=(Coupon)/(r)`

where r =yield to maturity

Therefore
`PresentValue=(580)/(0.066)` = $8,787.88

Each console bond is currently selling at $8,787.88 and to raise $32 million , Forever yours will have to sell
`(32,000,000)/(8,787.88)` bonds.

This translates to 3,641.38 bonds. To raise enough money they will thus have to sell 3,642 bonds.