Micalah's Crafts needs $225,000 today to purchase some new equipment. They are planning on issuing 10-year bonds with a 6% coupon rate and semi-annual interest payments. The current market rate of interest is 6.5%. How many bonds must Micalah's Crafts sell to raise the money they need?

Question

Quizplus · Accepted Answer

The bonds will sell at a discount because the coupon rate (6%) is less than the market rate (6.5%). The present value of each bond's cash flows (interest payments and principal) must be calculated using the market rate. The number of bonds needed is determined by dividing the total amount needed ($225,000) by the price of one bond calculated using the present value formula. This results in needing to sell approximately 234 bonds.

Micalah's Crafts Needs $225,000 Today to Purchase Some New Equipment