Ashok Co. wants to issue new 19-year bonds for some necessary expansion projects. The company currently has 8.2% coupon bonds on the market that sell for $1,148.09, make semiannual payments, and mature in 19 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000.

Question

Roger George

Business

15 April, 12:59

Ashok Co. wants to issue new 19-year bonds for some necessary expansion projects. The company currently has 8.2% coupon bonds on the market that sell for $1,148.09, make semiannual payments, and mature in 19 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000.

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Answers (1)

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Lillian Hoover · Answer 1

6.8%

Explanation:

For a bond to sell at par, it means that the price is $1000 which is the same as the Face value and the YTM will be equal to the coupon rate.

Using a financial calculator, input the following;

Future value; FV = 1000

Price; PV = - 1148.09

Time to maturity of the bond; N = 19*2 = 38 semi-annual payments

Semiannual coupon payments; PMT = (8.2%/2) * 1000 = 41

then compute the semiannual interest rate; CPT I/Y = 3.4%

Annual rate (YTM) = 3.4%*2 = 6.8%

Therefore, the coupon rate would be 6.8%