Suppose your company needs to raise $15 million and you want to issue 6-year bonds for this purpose. Assume the required return on your bond issue will be 10 percent, and you’re evaluating two-issue alternatives, an 8 percent semiannual coupon bond, and a zero-coupon bond. Your company's tax rate is 35 percent. a) How many coupon bonds would you need to issue to raise the $15 million? How many of the zero-coupon bonds would you need to issue? b) In 6 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zero-coupon bonds? c) Calculate Macaulay duration and Modified Duration for both bonds. Also, explain the interpretation of these numbers.
Suppose your company needs to raise $15 million and you want to issue 6-year bonds for this purpose. Assume the required return on your bond issue will be 10 percent, and you’re evaluating two-issue alternatives, an 8 percent semiannual coupon bond, and a zero-coupon bond. Your company's tax rate is 35 percent.
a) How many coupon bonds would you need to issue to raise the $15 million? How many of the zero-coupon bonds would you need to issue?
b) In 6 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zero-coupon bonds?
c) Calculate Macaulay duration and Modified Duration for both bonds.
Also, explain the interpretation of these numbers.
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