The company is planning to issue consol bonds. Consol bonds are the bonds that have a perpetual life and, pays a fixed coupon payment.
In the given question, the bond will make annual coupon payment of $900. The current YTM is 7.00%.
Since, these bonds have no fixed life thus, its coupon payments will form a perpetuity. The price of the bond can be calculated using the following formula of perpetuity:
Price of bond = Annual coupon payment / YTM
Price of bond = $900 / 7.00%
Price of bond = $12,857.14286
Thus, the current price of the bond is $12,857.14286
The company wants to raise $40,000,000. The current price of the bond is $12,857.14286 . Calculate the number of bonds to be issued using the following formula:
Number of bonds to be issued = Amount to be raised / Current price of the bond
Number of bonds to be issued = $40,000,000 /12,857.14286
Number of bonds to be issued = 3111.11111 bonds
Thus, the company must issue 3,111 bonds.