Example 1

Last year, The CYS sold $40,000,000 worth of 7.5% coupon, 15-year maturity, $1000 par value, AA-rated; non-callable bonds to finance its business expansion. These bonds pay semi-annual coupon payments. At issuance, the yield to maturity was 8.4%. Currently, investors are demanding a yield of 8.5% on similar bonds.

(a)If you own one of these bonds and want to sell it, how much money can you expect to receive on it?

(b)If you can reinvest the coupons you receive at a rate of 6% (monthly compounded APR), what is your actual return from holding the bond for one year since last year?

Example 2

CYS Inc. wants to raise $3 million by issuing 10-year zero coupon bonds with a face value of $1,000. Their investment banker informs them that investors would use a 9.25% (semi-annually compounded APR) discount rate on such bonds. At what price would these bonds sell in the market place assuming semi-annual compounding? How many bonds would the company have to issue in order to raise $3 million?