CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 3, Problem 14PROB
Summary Introduction
GE needs $345 million to support operations. To raise the needed funds, the firm issued bonds at $1,000 each bond. The flotation cost is 8%. Calculate the number of outstanding bonds to be issued.
Debt financing is the process of raising debt capital by issuing shares to investors due to short-term need or long-term goal or for the future growth of the firm.
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Consider the following two bonds:
Bond A
Bond B
Face value
$1,000
$1,000
Coupon rate (annual)
8%
8%
YTM
9%
7%
Maturity
10 years
10 years
Price (PV)
?
?
Calculate the price for each bond. What is the primary factor affecting the prices of the bonds? Indicate which bond is premium and which one is discount. Is there any relationship between the YTM and the coupon rate in case of premium/discount bonds?
Now, consider the following two bonds:
Bond X
Bond Y
Face value
$1,000
$1,000
Coupon rate (annual)
8%
8%
YTM
11%
11%
Maturity
5 years
10 years
Price (PV)
?
?
Calculate the price for each bond. What is the relationship between bond price and maturity, all else equal?
A bond with a par value of $1,000 and a maturity of 8 years is selling for $925. If the annual coupon rate is 7%, what’s the yield on the bond? What would be the yield if the bond had semiannual payments?…
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