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Snap Slug Sound Engineering Company needs to raise some funds to pay for expansion. They issue $12,000,000 worth of 9 year debentures paying interest at 12.25% pa payable semi-annually. When the debentures are issued, interest rates in the debt-capital market are j2 = 12.5% pa compounded semi-annually. Calculate the amount of capital raised.

Guest Mar 4, 2017
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A "debenture" is essentially a "bond" and is priced as such:

1 - Find the PV of the $12,000,000 par value using the market rate of 12.50%.

2 - Find the PV of the semi-annual coupons at the market rate of 12.50%

3 - Add the two together to get the amount of money raised.

 

PV of the par value of $100 at maturity =$33.580.

PV of the semi-annual coupons =$65.092

Price of the debenture     =$33.580 + $65.092 =$98.672 per $100.

$98.672/100 x $12,000,000 =$11,840,640 - amount of capital raised.

Guest Mar 4, 2017

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