Chamberlain Co. wants to issue new 16-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,035, make semiannual payments, and mature in 16 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

The coupon rate will be 6.6415%.

Explanation:

By using the financial calculator, the I/Y will be computed:

Where

PMT = 7/2 % * 1,000

= $35

PV = - $1,035

FV = 1,000

N = 16 * 2

= 32

It is semiannually, so the number of years got doubled.

Then press CPT and I/Y

I/Y = 3.3207

In order to compute the coupon rate, again financial calculator will be used:

PV = - $1,000

FV = $1,000

N = 32

I/Y = 3.3207

Then Press CPT and PMT

PMT = 33.2075

Coupon rate = PMT / FV * 100

= 33.2705 / 1,000 * 100

= 3.32075%

The coupon rate will also be double:

= 3.32075% * 2

= 6.6415%

This is the annual rate.