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1 July, 10:51

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?

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  1. 1 July, 11:09
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    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.
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