Metro City needs $ 200,000,000 to build a light-rail system. The city’s financial advisors believe that it will be able to borrow the money by issuing a 30-year bond with an annual coupon rate of 4.8 percent that pays interest every six months. However, interest rates have been very volatile over the last year ranging from 4.6 percent to 5.1 percent for borrowers with Metro’s credit rating. As a result, Metro’s town manager is concerned. If rates rise while the offering is in registration, Metro will not get the $ 200 million it needs from the sale of its bonds. To make sure they will be able to raise enough money, Metro’s financial advisors have recommended that Metro register a total of $ 250 million worth of bonds. In the event that rates rise above 4.8 percent, Metro will sell enough additional bonds to get the $ 200 million they need for the rail system.
1. If rates rise to 4.95 percent on the day the bonds are sold, how much would Metro receive from the sale of $ 200 million worth of bonds?
2. What is the par value of the additional bonds that Metro must sell to raise the required $ 200 million.
A. Solve using a spreadsheet program such as Excel.
B. Solve using a financial calculator.

  • CreatedDecember 19, 2014
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