Deloraine Ltd (Deloraine) is a small listed public company that needs to raise $1.5 million for a

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Question:

Deloraine Ltd (Deloraine) is a small listed public company that needs to raise $1.5 million for a new capital project. It considers a few options for raising debts in the capital market.

Option 1 is to issue coupon bonds with a face value of $1,000, a coupon rate of 6.5% paid semi-annually, and a bond term of 10 years. A comparable bond in the market is currently traded at a 7.4% yield to maturity.

Option 2 is to issue zero-coupon bonds with a face value of $1,000 for 10 years. Similar bonds' comparable yield to maturity is 7.4% (assuming a semi-annual compounding rate).

a. Calculate the price of the coupon bond. How many bonds need to be issued for the fundraising?

b. Calculate the price of the zero-coupon bond. How many bonds need to be issued to raise a total of $1.5 million?

c. What will be the change in the price of the coupon bond if the yield to maturity is 6.8%.

d. What will be the change in the price of the zero-coupon bond if the yield to maturity is 6.8%. Comment on the price sensitivity of two bonds given the change in the yield to maturity in the market.