Question

xyz co. wants to issue new 25 year bonds for some much needed expansion projects. The company currently has 4.9% coupon bonds on the market that sells for 1123,make semiannual payments, have a 1000 par value and mature in 19 years. What coupon rate should the company set on its new bonds if it wants to sell them at par?

Answer 1

Ans:-In this question it is given that the company wants to issue 25 year bonds for some much-needed expansion projects. The coupon rate is 4.9% on the market that sells for 1123, makes semi-annual payments, has a 1000 par value and matures in 19 years.  

As per this question if the company wants the bond to sell at par then the coupon rate which company should set will be equal to YTM i.e Yield to maturity

The coupon rate is 4.9%, NPER will be 38(19 *2 since the maturity is 19 years with semi-annual payments)

PMT will be Par value * coupon rate / 2 =24.2, Face value is given 1000.

The required coupon rate that company should set if they want to sell them at par will be given by

Yield To Maturity = Rate * 2

we can calculate the yield to maturity using excel formula = Rate(nper,pmt,pv,fv)*2

= Rate(38,24.5,-1123,1000)*2= 3.97%.

Note:- To find YTM In excel formula we need to put Present value with a negative sign and we multiplied by 2 because it has semi-annual payments.

Therefore 3.97% will be the required rate.