Question

General Matter’s outstanding bond issue has a coupon rate of 10.8%, and it sells at a yield to maturity of 8.75%. The firm wishes to issue additional bonds to the public at face value. What coupon rate must the new bonds offer in order to sell at face value? (Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Yield to maturity of bond measures required rate of return on bond investment considering current level of risk of company. if risk level of investment in bond is high then yield to maturity would also be high and if risk level is lower then yield to maturity would also be lower.

General Matter’s outstanding bond issue has coupon rate of 10.80% which was issued few years ago. due to change in risk level of investment in company or any other factor required rate of return in company or yield to maturity changes to 8.75%. So, if company wants to issue new bond then coupon rate of new bond is equal to yield to maturity of existing bond.

So, Coupon rate on new bond is equal to 8.75%.