Question

Seether Co. wants to issue new 19-year bonds for some much-needed expansion projects. The company currently has 6.4 percent coupon bonds on the market that sell for $780.37, 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?

Answer 1

The coupon rate that we need to set is the annual Yield to Maturity (YTM) of the Bond

• The Yield to maturity of (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value
• The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.
• The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.40% x ½]	PMT	32
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [19 Years x 2]	N	38
Bond Price [-$780.37]	PV	-780.37

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the semi-annual yield to maturity (YTM) on the bond = 4.40%.

Here, we’ve the semi-annual Yield to maturity = 4.40%.

Therefore, the annual Yield to Maturity of the Bond = 8.80% [4.40% x 2]

“Therefore, the company need to set a coupon rate of 8.80%”