Question

Bond Yields: Uliana Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6% coupon bonds on the market with a par value of $1,000 that sell for $967, make semiannual payments, and mature in 20 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 the company should set on its new bonds if it wants them to sell at par is 6.3%.

First step

Using financial calculator to calculate the rate

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

Where:

Coupon rate = 6%

NPER = (20 yrs x 2 periods)=40

PMT = [(1000 x 6%)/2]=30

Face Value = 1000

Price(PV) =$967

Hence:

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

Rate=(40, 30, -$967, 1000)

Rate = 3.15%

Second step is to calculate the coupon rate

Yield to Maturity = 3.15% x 2

Yield to Maturity = 6.3%

Inconclusion the coupon rate that the company should set on its new bonds if it wants them to sell at par is 6.3%.

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