Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.
a. 4,228
b. 4,337
c. 4,448
d. 4,562
e. 4,676
1
Expert's answer
2012-01-19T11:11:04-0500
Answer: b) 4 337
Explanation:
We need to find the price of OID bond:
1) Calculate total yield of Bond Par: - 25 years with 10% semiannually = 25 * 2 * 0.1 * 1 000 (bond nominal) = 5 000 - returning the bond = 1 000 - so we have total yield = 1 000 + 5 000 = 6 000
2) yield effectiveness of Bond Par = total yield / bond price (for Bond Par bond price is equal to bond nominal), for Bond Par it equals 6 000 / 1 000 = 6
3) Total yield of OID bond: - 25 years with 6.25% semiannually = 25 * 2 * 0.0625 * 1 000 = 3 125 - returning the bond = 1 000 - so we have total yield = 1 000 + 3 125 = 4 125
4) yield effectiveness of OID bond = 4 125 / OID bond price, the effectiveness of Bond Par and OID bond are equal, so 4 125 / OID bond price = 6, OID bond price = 687.5
5) to raise 3 000 000 Cosmic must issue 3 000 000 / 687.5 = 4 337 bonds
Dear visitor, please use panel for submitting new questions
Asim
09.12.19, 07:45
Effective Yield 0.05 NPER 50 Coupon 31.25 FV 1000 how calculate 657.70
share formula
D P
17.07.13, 07:14
I worked with a tutor and came up with D. The required rate of return,
or effective yield is the same as the coupon rate only if (as in this
case) the bond is selling at par. Effective Yield 0.05 NPER 50 Coupon
31.25 FV 1000 Present Value of OID 657.7 3000000/657.70= 4561.34 It
appears that the "expert" made the mistake of not dividing coupon
payments by two for the semiannual periods.
No Thanks
27.01.13, 07:02
Answer 4337 is wrong. The answer is 4562
Leave a comment
Thank you! Your comments have been successfully added. However, they need to be checked by the moderator before being published.
Numbers and figures are an essential part of our world, necessary for almost everything we do every day. As important…
APPROVED BY CLIENTS
Finding a professional expert in "partial differential equations" in the advanced level is difficult.
You can find this expert in "Assignmentexpert.com" with confidence.
Exceptional experts! I appreciate your help. God bless you!
Comments
Dear visitor, please use panel for submitting new questions
Effective Yield 0.05 NPER 50 Coupon 31.25 FV 1000 how calculate 657.70 share formula
I worked with a tutor and came up with D. The required rate of return, or effective yield is the same as the coupon rate only if (as in this case) the bond is selling at par. Effective Yield 0.05 NPER 50 Coupon 31.25 FV 1000 Present Value of OID 657.7 3000000/657.70= 4561.34 It appears that the "expert" made the mistake of not dividing coupon payments by two for the semiannual periods.
Answer 4337 is wrong. The answer is 4562
Leave a comment