Question

Your firm has 7,500 bonds outstanding currently priced at 1,105.74, paying a40 annual coupon and sporting a 0.8901 YTM. How much cash will your firm need on hand to cover the next coupon payment?

1) $150,000
2) $300,000
3) about $3.3 million

Answer 1

To cover the next coupon payment, the firm will need $300,000 on hand, calculated by multiplying the annual coupon of $40 by the 7,500 bonds outstanding.

Step-by-step explanation:

To calculate how much cash the firm will need on hand to cover the next coupon payment, we need to consider the details of the bond. The bond pays an annual coupon of $40, and there are 7,500 bonds outstanding. Multiplying the annual coupon per bond by the number of bonds gives us the total cash needed for the next coupon payment:

Total cash needed = Annual coupon per bond × Number of bonds

Total cash needed = $40 × 7,500

Total cash needed = $300,000

Therefore, the firm will need $300,000 on hand to cover the next coupon payment.