Question

JRJ Corporation recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, that is, they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same Yield to Maturity, how many new bonds must JRJ issue to raise $2,000,000?(Hint find the YTM of first bond the find the value of 2nd bond)

Answer 1

Answer: 2596 bonds

Explanation:

The following information can be gotten from the question:

Coupon rate = 8.0%

Face value = 1000

Year to maturity = 10

NPER = 20

PMT = Face value × Coupon rate / 2 =(1000 × 0.08) / 2 = 80/2 = 40

Yield = 12%

Rate = Yield / 2 = 12% / 2 = 6%

We then calculate the net proceeds which will be:

= PV(rate, NPER, PMT, FV)

= PV(6%, 20, 40, 1000)

= $770.60

We should note that the amount that needed to be raised is $2,000,000. Therefore, the bond that will be needed to be sold will be:

= $2,000,000 / 770.60

= 2596 bonds