ABC is considering raising $625,000 for a new capital project. They have 2 options Option 1 is

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Question:

ABC is considering raising $625,000 for a new capital project. They have 2 options

Option 1 is to issue the coupon

Option 2 is to issue a zero coupon

The coupon have a maturity of 8 years paying a semi annual 6% p.a. coupon rate and a face value of $100. In the market, the comparable bond has a market yield of 7.5% pa

a) calculate the expected price of the coupon and the zero coupon and the number of bonds ABC should raise in both cases

b) ABC expects the bond yield to increase to 8% pa at insurance. Calculate the bond price change when the yield change to 8%. Comment on the price sensitivity of this bond