A mining company needs to raise $100 million in order to begin open-pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the company's bonds are rated A, what will be their selling price?

Question

Quizplus · Accepted Answer

To calculate the selling price of the bonds, we need to use the formula:

selling price = (coupon payment / yield) x [1 - 1 / (1 + yield)^n] + face value / (1 + yield)^n

where:
- coupon payment = face value x coupon rate = $65 per bond
- yield = yield to maturity for A-rated bonds = 5.75%
- n = number of years until maturity = 30

Plugging in these values, we get:

selling price = (65 / 0.0575) x [1 - 1 / (1 + 0.0575)^30] + 1000 / (1 + 0.0575)^30
selling price = $1,054.48

Therefore, the correct answer is option C.

A Mining Company Needs to Raise $100 Million in Order