Question
You are asked to analyze the following potential bond issue & answer the following questions. The bonds would be used to fund a $40,000,000 initiative
| You are asked to analyze the following potential bond issue & answer the following questions. | ||||||
| The bonds would be used to fund a $40,000,000 initiative for a company. | ||||||
| Years to maturity | 25 | ||||
| Required return | 5.25% | ||||
| Amount needed | 40,000,000 | ||||
| Face value | $1,000 | ||||
| Coupon rate | 5.75% | ||||
| Tax rate | 21.00% | ||||
| Year bond is called | 8 | ||||
| Spread above Treasury | 0.40% | ||||
| Treasury rate at call | 4.80% | ||||
| Treasury rate at call | 6.20% | ||||
| The firm is considering issuing either a coupon bond (info above) or a zero coupon bond. | |||||
| The yield on either will be 5.25%. The face value is the same for both bonds. | |||||
What is Value of Coupon Bond ... I got -1068.74
What is Value of Zero Coupon Bond ... I got -278.26
How many of each bond would be needed to fund the firm's needs? (Coupon and Zero)
Coupon I got 40,000
Zero I got 143,750.45
How much would the principal repayment be for each bond issue at maturity?
If cash flow is not a concern for the firm which bond would you recommend?
If cash flow is a concern for the firm which bond would you recommend?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Options Futures And Other Derivatives
Authors: John C. Hull
4th Edition
0130224448, 9780130224446
