Hard Spun Industries HSI has a project that it expects will

Hard Spun Industries (HSI) has a project that it expects will produce a cash flow of $3.2 million in 14 years. To finance the project, the company needs to borrow $2.4 million today. The project will also produce intermediate cash flows of $240,000 per year that HSI can use to service coupon payments of $120,000 every six months. Based on the risk of this investment, market participants will require a 9.0% yield. If HSI wishes a maturity of 14 years (matching the arrival of the lump sum cash flow), what does the face value of the bond have to be? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis. (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

Solution

Semi-annual Coupons=120000

YTM=9%

Maturity=14 years or 28 semi-annual periods

Current price=2400000

-2400000+120000/0.045*(1-(1/1.045)^28)+FV/(1.045^28)=0

=>FV=1752080 or $1.752080 million