Chamberlain Co. wants to issue new 15-year bonds for some much-needed expansion projects. The company currently has 6 percent coupon bonds on the market that sell for $1,030, make semiannual payments, and mature in 15 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

Question

Leonard Mckenzie

Business

25 June, 20:54

Chamberlain Co. wants to issue new 15-year bonds for some much-needed expansion projects. The company currently has 6 percent coupon bonds on the market that sell for $1,030, make semiannual payments, and mature in 15 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

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Answers (1)

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Mccoy · Answer 1

Coupon rate is 5.70%

Explanation:

The coupon rate the company should set if it wants to sell the bond at par should be the coupon rate equal to yield to maturity, hence by by calculating the yield to maturity, we have indirectly calculated the coupon rate on the bond.

The formula for yield to maturity is given by : =rate (nper, pmt,-pv, fv)

the nper is the time to maturity of 15 years multiplied by 2 since it a semi-annual interest paying bond

pmt is the semi-annual coupon interest which:6%/2*$1000=$30

pv is the current market price of the bond which is $1030

fv is the value of the bond at redemption which is $1000

=rate (30,30,-1030,1000)

rate=2.85%

Annual rate=2.85%*2

=5.70%