Corporate Bonds

Question: SELLING price of a bond?

I need help with this study problem. I wasn't in class this day. I was stuck in a snow storm. Forgot to ask teacher. Test tomorrow.

the board of directors has decided to raise funds for the new plant by issuing $2,450,000 of 11% Corporate Bonds on May 1, 2005, due on May 1, 2020, with interest payable each May 1 and November 1. At the time of issuance, the market interest rate for similar financial instruments is 12%.

Determine the selling price of the bonds. (Hint: When interest payments are made semiannually, you must double the number of periods and half the interest rate in calculating the present value for both cash flows.)

CAN YOU PLEASE HELP ME!
Also,can you explain how you got your answer.
thanks guys!!
Jayson

Answer: The idea is that the cash flow of the newly issued bonds is the same as for the ones presently on the market. In other words, for X dollars invested, I should be getting the same 12% return (not 11%, as it's too low for the market rates).

So, I am going to look at the bonds issued and calculate the payment amount using $2,450k as the present value and 11% interest and the payment schedule described. Works out to $168,573.20. These are the payments that the company will pay, so they are the same for both cashflows.

Now, I am going to imagine a market-priced cashflow which has the same beginnig and end dates, same payments schedule, same exact payments from the previous calculations and 12% interest. We need to find the PV which happens to be 2,320,381.63.

Here are the rest of the parameters used for both calculations:
FV=0 (bonds will be paid off at the end)
NP = 30 (15 years of payments 2 times/year)
IR = 5.5% (for 11% rate) or 6% (for 12% rate)
PV = $245000 (first calculation only)
Find PMT at IR=6%, change IR to 5.5% and calculate PV.

Thaw in Corporate Bond Issuance, Investors Hungry for Yield - Bloomberg