Question

Cali Inc. wants to issue new 10-year bonds to fund its new investments. The company currently has 5 percent coupon bonds on the market that sell for $1,060. These bonds make semi-annual payments, and mature in 10 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?What is the yield to maturityon the bonds?

Answer 1

Answer:
Calculation of cost of Debt
Formula =
Cost of debt =	Lower rate +	Price at lower rate - Current price	x (Higher rate - Lower rate)
		Price at lower rate - Price at higher rate
Price=	Present value of all future Cash inflows
Current price	1060.00
Present value at lower rate   =		4%			Present value at higher rate   =	5%
Year	Cash Inflows	Present value factor @ 2%	Present value of cash inflows		Year	Cash Inflows	Present value factor @ 2.5%	Present value of cash inflows
1	25.00	0.98039	24.51		1	25.00	0.9756	24.39
2	25.00	0.96117	24.03		2	25.00	0.9518	23.80
3	25.00	0.94232	23.56		3	25.00	0.9286	23.21
4	25.00	0.92385	23.10		4	25.00	0.9060	22.65
5	25.00	0.90573	22.64		5	25.00	0.8839	22.10
6	25.00	0.88797	22.20		6	25.00	0.8623	21.56
7	25.00	0.87056	21.76		7	25.00	0.8413	21.03
8	25.00	0.85349	21.34		8	25.00	0.8207	20.52
9	25.00	0.83676	20.92		9	25.00	0.8007	20.02
10	25.00	0.82035	20.51		10	25.00	0.7812	19.53
11	25.00	0.80426	20.11		11	25.00	0.7621	19.05
12	25.00	0.78849	19.71		12	25.00	0.7436	18.59
13	25.00	0.77303	19.33		13	25.00	0.7254	18.14
14	25.00	0.75788	18.95		14	25.00	0.7077	17.69
15	25.00	0.74301	18.58		15	25.00	0.6905	17.26
16	25.00	0.72845	18.21		16	25.00	0.6736	16.84
17	25.00	0.71416	17.85		17	25.00	0.6572	16.43
18	25.00	0.70016	17.50		18	25.00	0.6412	16.03
19	25.00	0.68643	17.16		19	25.00	0.6255	15.64
20	1025.00	0.67297	689.80		20	1025.00	0.6103	625.53
		Total	1081.76				Total	1000.00
Price at higher rate	1081.76				Price at higher rate	1000.00
Cost of Debt (semi annual)	2% +	21.7572	x (2.5-2)%
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