JOSHUA INC. WANTS TO SELL BONDS TO FINANCE ITS BUSINESS EXPANSION....
11. Joshua Inc. wants to sell bonds to finance its business expansion. To accomplish this, they plan to sell 20-year, $6.2 million face value, zero-coupon bonds. The bonds will be priced based on a yield to maturity of 9.5%. How many bonds must they sell to raise the required capital? A) 38,079 B) 42,500 C) 54,500 D) 57,500 E) 61,333 Solution: A The bond price is the present value of all future cash flows discounted at the required rate of return (i.e. YTM). Note that there are no coupons in this case. Bond Price (PV) = $1,000 / (1 + 0.095)
20
= $162.82 for 1 bond ($1,000 face value). We have $6,200,000 (face value) bonds therefore the number of bonds required can be calculated as $6,200,000 / $162.82 = 38,079