Question

Forever Yours Insurance Company need to raise $32,000,000. They decide to do so through the issuance of consol bonds. Each bond will have an annual coupon of $580. Given the current 6.60% yield to maturity on the firm’s bonds, how many bonds must the firm issue?

Answer 1

Answer:

Forever Yours  have to sell 3,642 bonds to raise $32million.

Explanation:

A consol is a bond with no maturity date. The coupon payments thus represent a perpetual income stream. The present value of a perpetuity is calculated as follows:

$PresentValue=\frac{Coupon}{r}$

where r =yield to maturity

Therefore $PresentValue=\frac{580}{0.066}$ = $8,787.88

Each console bond is currently selling at $8,787.88 and to raise $32 million , Forever yours will have to sell $\frac{32,000,000}{8,787.88}$ bonds.

This translates to 3,641.38 bonds. To raise enough money they will thus have to sell 3,642 bonds.