Question

Seether Co. wants to issue new 11-year bonds for some much-needed expansion projects. The company currently has 8.2 percent coupon bonds on the market that sell for $985.82, make semiannual payments, and mature in 11 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

answer choices:

8.40%

8.70%

8.30%

8.10%

4.20%

Answer 1

Explanation:

The company should set the coupon rate on its new bonds equal to therequired return. The required return can be observed in the market by finding the YTM on the outstanding bonds of the company. So, the YTM on the bonds currently sold in the market is:

P = $985.82= $41(PVIFAR%,22) + $1,000(PVIFR%,22)

Using a spreadsheet, financial calculator, or trial and error we find:

R = 4.20%

This is the semiannual interest rate, so the YTM is:

YTM = 2 × 4.20%

YTM = 8.40%

Thanks