Question

Things Get Messi Enterprises is issuing new bonds for a capital budgeting project. The bonds will have 15.00 year maturities with a coupon rate of 7.25% APR with semi-annual coupon payments (assume a face value of $1,000 on the bond). The current market rate for similar bonds is 7.20% APR. The company hopes to raise $40.00 million with the new issue. Based on the current market rate, what will a new bond sell for? Answer format: Currency: Round to: 2 decimal places.

Answer 1

The sale price of the bond issued by Things Get Messi Enterprises can be determined by comparing the coupon rate to the market rate and then calculating the present value of the expected cash flows from the bond. Since the bond's coupon rate is slightly higher than the market rate, it will sell at a premium to its face value.

Step-by-step explanation:

The question deals with calculating the price of a new bond based on its coupon rate and the current market rate. The bond in question has a 7.25% APR coupon rate with semi-annual payments and a 15-year maturity. To determine the price of the bond, we can compare the coupon rate to the market rate of similar bonds, which is 7.20% APR. Considering the market rate of 7.20% is slightly lower than the bond's coupon rate of 7.25%, the bond will sell at a premium to its face value.

However, to calculate the exact sale price of the bond, you would use the formula for the present value of an annuity to account for the semi-annual coupon payments, and the present value of a lump sum for the face value of the bond that will be received at maturity. It is also important to note that the sale price of the bond is influenced by the fact that the bond's coupon rate is higher than the prevailing market rate, which means the bond is more attractive to investors and will sell for more than its face value.