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Selling bonds. Rawlings needs to raise ​$ for its new manufacturing plant in Jamaica. Berkman Investment Bank will sell the bond for a commission of . The market yield is currently on​ twenty-year zero-coupon bonds. If Rawlings wants to issue a​ zero-coupon bond, how many bonds will it need to sell to raise the ​$​? Assume that the bond is semiannual and issued at a par value of . How many bonds will Rawlings need to sell to raise the ​$​?

User Spina
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1 Answer

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25 votes

The question is incomplete. The complete question is :

Selling bonds. Rawlings needs to raise $41,800,000 for its new manufacturing plant in Jamaica. Berkman Investment Bank will sell the bond for a commission of 2.2 %. The market yield is currently 7.7 % on twenty-year zero-coupon bonds. If Rawlings wants to issue a zero-coupon bond, how many bonds will it need to sell to raise the $41,800,000?? Assume that the bond is semiannual and issued at a par value of $ 1000. How many bonds will Rawlings need to sell to raise the $41,800,000?

Solution :

We know that a zero compound bond does not pay any coupon payments, so the bond price is present value for the cash inflow from a zero coupon bond.

The present value of a maturity value uses a YTM as a discount rate.

We will find the semi annual rates and the time periods as the semi annual bond is given.

The semi annual YTM is =
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= 3.85 %

Number of the semi annual periods till maturity = 20 x 2

= 40

The bond price =
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= $ 220.668308088

The investment bank will then sell the bonds at a price above but the charge will be2.2% commission on the above price.

The net proceeds to Rawlings
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= $ 215.813605311

∴ The number of bonds required :


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image

= 193,685.657

193,686 bonds

User Gehad
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