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Flying High Inc. plans to raise $5,000,000 external financing by issuing bonds, and is considering two options: regular bonds & zero couple bonds. The regular bonds will have coupon rate at 10%, payable semi-annually, with face value of $1,000 each and maturity of 5 years. The zero coupon bonds will be the similar as the regular bonds except that there is no coupon attached to these bonds, i.e. no interest payment throughout the life of the zero coupon bond.
Present market interest rate for 5-year bond of same bond issuers like Flying High Inc. is 8%. Suppose there is no issuance cost.
Requirements: Show your calculation
a. Determine the price of regular bonds at the time of issuance.
b. Based on $1,000 face value for each bond, what is the minimum number of regular bonds to be issued to raise the required external financing of $5,000,000?
c. Determine the price of zero coupon bonds at the time of issuance.
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