PGP Co. expects to issue a $1,000 face-value bond that matures in 8 years. The annual coupon rate is 9% and interest payments are expected to be paid annually. Similar bonds are currently priced at 101.4% of face value. Given this information, what is the required return by bond holders

Question

Lena Stephenson

Business

4 April, 19:23

PGP Co. expects to issue a $1,000 face-value bond that matures in 8 years. The annual coupon rate is 9% and interest payments are expected to be paid annually. Similar bonds are currently priced at 101.4% of face value. Given this information, what is the required return by bond holders

+1

Answers (1)

Know the Answer?

Maritza Johnston · Answer 1

Required return is 8.75%

Explanation:

Given,

FV (Face Value) is $1,000

PV (present Value) is computed as:

PV = FV * Price

= $1,000 * 101.4%

= $1,014

Nper (Number of years) is 8 years

PMT (Monthly payment) is computed as:

PMT = FV * Coupon rate

= $1,000 * 9%

= $90

r (Required return) is computed by using the excel formula:

=Rate (nper, pmt, pv, fv, type)

= Rate (8,90,-1014,1000,0)

= 8.75%