The App Store needs to raise $2.8 million for expansion. The firm wants to raise this money by selling 20-year, zero-coupon bond
s with a par value of $1,000. The market yield on similar bonds is 6.49 percent. How many bonds must the company sell to raise the money it needs?
1 answer:
Answer:
10,064 bonds
Explanation:
Given:
Amount to be raised = $2,800,000
Par value (FV) = $1,000
Maturity (nper) = 20×2 = 40 periods
Yield (rate) = 6.49 ÷ 2 = 3.245% or 0.03245
Coupon payment is 0 as it's a zero coupon bond.
Assume it's compounded semi-annually.
Calculate the price of the bond today using spreadsheet function =PV(rate,nper,pmt,FV)
Price of bond is $278.23
PV is negative as it's a cash outflow.
Number of bonds to be sold = Total amount to be raised ÷ Price of bond
= 2,800,000 ÷ 278.23
= 10,064 bonds
Company should sell 10,064 bonds to raise $2.8 million
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Explanation:
Capital Market Line (CML)
Expected return on the market portfolio, E() = 12 %
Standard deviation on the market portfolio, σ = 20%
Risk-free rate, = 5%
E() =
+ [ E(
) -
] × ( σ
÷ σ
)
= 0.05 + [ 0.12 - 0.05] × (0.10 ÷ 0.20)
= 8.5%