Question: A firm considers borrowing around USD 7.4 million (present value) in the bond markets. There are two possibilities. The first is to issue 10000 bonds,

A firm considers borrowing around USD 7.4 million (present value) in the bond markets. There are two possibilities. The first is to issue 10000 bonds, with face value of USD 1000, maturity of 9 years, yield to maturity (YTM) of 8%, a 4% coupon rate, making semi-annual payments. The second possibility is to issue 10000 bonds with face value USD 100, maturity of 15 years, a YTM of 9.5%, 90% coupon rate, making semi-annual payments. a. For each bond, draw a table with the schedule of the firms cash payments over time: periods in column 1, cash flows in column 2 and discounted cash flows (discounted to the present) in column 3. b. Obtain the sum of the present values of all cash payments. How do you interpret this value? c. Which bond has the longest duration? d. If interest rates are expected to decrease, which bond issue is the best alternative for the firm? Discuss. e. Which additional features would you advise the bond indenture to contain to protect the firm against interest rate risk?

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