JJM 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, how many new bonds must JRJ issue to raise $2,000,000?

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Answer:

2,596

Step-by-step explanation:

Calculation to determine how many new bonds must JRJ issue to raise $2,000,000

Given,

Coupon rate = 8.0%

Face value = 1000

Year to maturity = 10

NPER = 20

First step is to calculate the PMT using this formula

PMT = Face value × Coupon rate / 2

Let plug in the formula

PMT=(1000 × 0.08) / 2

PMT= 80/2

PMT= 40

Second step is to calculate the Rate using this formula

Yield = 12%

Rate = Yield / 2

Let plug in the formula

Rate= 12% / 2

Rate= 6%

Third step is to calculate the net proceeds using this formula

Net proceeds= PV(rate, NPER, PMT, FV)

Let plug in the formula

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

Net proceeds= $770.60

Now let calculate how many new bonds must JRJ issue to raise $2,000,000

New bonds needed= $2,000,000 / 770.60

New bonds needed= 2,596 bonds

Therefore how many new bonds must JRJ issue to raise $2,000,000 will be 2,596 bonds