Reference no: EM133115681

Baseline Capital wants to raise $1,000,000 to fund an expansion of its business. To do this, it will issue bonds with 10 years to maturity, a face value of $1,000 and semi-annual coupon payments. The current market yield to maturity of similar bonds is 9% per annum.

a) If the company issued exactly 1000 bonds and raised a total of $1,000,000, how much should the semi-annual coupon payment of the bond be? Use bond pricing theory to explain why briefly.

b) Investor Mike purchased a bond at issuance and sold it at a market yield of 8% p.a.1.5 years later, right after the coupon payment. Calculate the selling price of the bond.

c) Draw a timeline and set out each cash flow that Mike paid and received from his investment in the bond for 1.5 years and calculate the holding period yield per annum he earned on this investment.

d) Baseline Capital was tempted to issue commercial papers to raise the required capital with a market yield of 2% p.a. Discuss if Baseline Capital should have issued commercial papers to raise the fund, given their lower cost of borrowing.