Problem
Wiki Limited is considering how to raise money for the expansion of its operation. One option is to issue a new, 15-year bond. In order to estimate the cost of this method of financing, i.e. the YTM of the new bond, the company has the following information for reference: First, the company currently has an outstanding bond issue, with 8 year before maturity, which pays 10% annual coupon, and is currently traded at 117.914 (percent of par). Secondly, the relevant yield curve indicates that the YTM for a 15-year bond is higher than a 8 year-bond with the same rating by 2%.
1. Find the YTM of the Wiki's currently outstanding bonds. (Hint: the required yield differs from the coupon rate of that bond by either 1%, or 2%, or 3%.)
2. Suppose the new bond is also to pay 10% annual coupon, calculate the issue price of the bond (as percentage of par).
3. Explain why the yield of a 15-year bond should be higher than that of a bond of the same company with 8 years to maturity, supposing no change in the rate of inflation is expected for the foreseeable future.
4. Suppose further that the flotation cost will amount to 3% of total proceeds from this bond issue, what will be total market value of the new bonds to be issued in order to raise $4,656,000 for capital expansion project.