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 remaine

Question

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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Khoii Minh 3 years 2021-08-21T14:49:27+00:00 1 Answers 31 views 0

Answers ( )

  1. taiduc
    0
    2021-08-21T14:50:54+00:00
    Reply

    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

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