Aurand Ltd wants to raise $1,500,000 to fund the expansion of its business. To do this, it will issue bonds with 10 years to maturity, a face value of $1,000 and a quarterly coupon payment of $20. The current yield to maturity of similar bonds in the market is 8% per annum.
a) How many bonds should Aurand Ltd issue to raise a total of $1,500,000? Use bond pricing theory to explain why briefly.
b) Assume investor Mike purchased a bond at issuance and sold it at a market yield of 9% p.a. one year later, right after the coupon payment. Calculate the selling price of the bond.
c) Draw a timeline and set out each cash flow that Mike paid and received from his investment in the bond for one year and calculate the holding period yield per annum he earned on this investment.
d) Was Mike’s holding period yield higher or lower than the yield to maturity he would earn if he kept the bond till maturity? Briefly explain why.
