Question

Whipple Corp. just issued 260,000 bonds with a coupon rate of 5.90 percent paid semiannually that mature in 25 years. The bonds have a YTM of 6.34 percent and have a par value of $2,000. How much money was raised from the sale of the bonds

Answer 1

Answer:

Amount raised = $236,027.47  

Explanation:

The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).

Value of Bond = PV of interest + PV of RV

The value of bond for Whipple Corp can be worked out as follows:

Step 1  

PV of interest payments

Semi annul interest payment  

= 5.6% × 2000 × 1/2 = 56

Semi-annual yield = 6.34%/2 = 3.17 % per six months

Total period to maturity (in months)

= (2 × 25) = 50 periods

PV of interest =  

56 × (1- (1+0.0317)^(-50)/0.0317)= 1395.49

Step 2  

PV of Redemption Value

= 2000 × (1.0317)^(-50)

= 420.105

Price of bond

= 1395.49 + 420.10

= $1815.60

The amount raised = price per bonds× Number of unit

= $1815.595× 260,000/2000=  $236,027.47  

Amount raised = $236,027.47