Laurinburg Precision Engineering Case Solution

1. Using present value analysis estimate the number of zero-coupon bonds(each with a face value of $1000) that will have to be offered to provide the $1 million Laurinburg Precision Engineering needs for expansion, if investors seek a yield of 10%. Assume interest will compound on a semiannual basis over the life of the five-year bond issue.

For a bond with a maturity of 5 years and an interest rate that is compounded semiannually and at 10%, the present value of the bond is

PV=1000/(1+0.05)^10 =613.91

It is necessary to sell a total of sixteen hundred twenty-nine bonds in order to bring in a total of one million dollars. You may make use of the following formula to get the answer to this question:

It works out to 1629 times (1000 minus 613.91), which results in a grand total of $628,940.61 being paid in interest fees.

This leads in a variance that, when added to the interest payment that is necessary for a pair bond at 10 percent, resulting in a total difference of $128,940.61 overall. This is because the unpaid interest on bonds with no coupons was carried over into the following year, which resulted in additional compound interest that needed to be paid at the end of the fifth year for bonds with no coupons. This was caused by the fact that the unpaid interest on bonds with no coupons was carried over into the next year. This is because the unpaid interest was carried over into the accounting for the next year, which is the reason why this occurred.

2. Assume that McKinnon and MacDougald decide to issue coupon bonds to finance the expansion of Laurinburg Precision Engineering. The terms of the $1,000 bonds due January 15, 2009, specify an interest rate of 10% with semiannual compounding of interest payments. However, Shelia Cox is able to find a group of investors who will accept a yield of 8% interest. How much will the investors be willing to pay for the 10% bonds?