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25 April, 17:28

KING company wants to issue new 10-years bonds to finance some needed expansion. The company currently has an 8 percent coupon bond ($1,000 par value) on the market that sell for $1,080, make semiannual payments and mature in 10 years. What annual coupon rate should the company set on its new bonds if it wants them to sell at par? g

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  1. 25 April, 17:59
    0
    Coupon rate is 7.41%

    Explanation:

    Using the price formula, the yield to maturity can be calculated first of all:

    Bond price=coupon interest / yield to maturity

    Bond price is $1080

    coupon interest is 8%*$1000=$80

    $1080=$80/yield to maturity

    $1080*yield to maturity=$80

    yield to maturity=$80/$1080

    =7.41%

    However if the price of the bond becomes the par value, the coupon rate can be calculated thus:

    $1000=coupon payment/7.41%

    coupon payment = $1000*7.41%

    coupon payment=$74.1

    coupon rate=$74.1/100=7.41%
  2. 25 April, 18:19
    0
    Annual coupon rate should be: 6.88%

    Explanation:

    * Yield to maturity (YTM) in semiannual format calculation:

    + Semi annual coupon payment = 1,000 x 8% / 2 = $40;

    + The YTM is the discount rate that brings the present value of coupon streams and face value repayment from the bond equals to its current price. So, we have:

    1,080 = [ (40/YTM) x (1 - (1+YTM) ^ (-20) ] + 1,000 / (1+YTM) ^20 YTM = 3.44%

    * Coupon rate calculation:

    If the company wants to sell at par (meaning they wants to gets $1,000), the coupon rate should be equal to the YTM, which is calculated above at 3.44% semiannual.

    => Annual coupon rate = 3.44% x 2 = 6.88%.

    So, the answer is 6.88%.
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Home » Business » KING company wants to issue new 10-years bonds to finance some needed expansion. The company currently has an 8 percent coupon bond ($1,000 par value) on the market that sell for $1,080, make semiannual payments and mature in 10 years.
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