Question

Seether Co. wants to issue new 17-year bonds for some much-needed expansion projects. The company currently has 6.8 percent coupon bonds on the market that sell for $840.71, make semiannual payments, and mature in 17 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

Answer 1

Information provided:

Par value= Future price= $1,000

Time= 17 years*2 = 34 semi-annual periods

Coupon rate = 6.8% /2 = 3.40%

Coupon payment = 0.034*$1,000 = $34

Current price = present value = $840.71

The question is solved by first calculating the yield to maturity.

Enter the below in a financial calculator to calculate the yield to maturity:

FV= 1,000

PV= -840.71

N= 34

PMT= 34

Press the CPT key and I/Y to compute the yield to maturity.

The value obtained is 4.3035

Therefore, the yield to maturity is 4.3035%*2= 8.6070%.

The amount of coupon payment is calculated first to compute the coupon rate.

The amount of coupon payment is calculated by entering the below in a financial calculator:

FV= 1,000

PV= -1,000

N= 34

I/Y= 4.3035

Press the CPT key and PMT to compute the amount of coupon payment.

The value obtained is 43.0358

Therefore, the amount of annual coupon payment is $43.0358*2 = $86.0696

Coupon rate = Annual coupon payment / Par value

= $86.0696 / $1,000

= 0.0861*100

= 8.61%.