Question

Klarion Inc. is looking to issue 30 year maturity public bonds for the first time. These bonds will pay annual coupon. The firm’s investment bankers at Goldman Sachs have assessed the bonds to have the same risk as those of Pryce Corp. The information about the Pryce bonds is specified below:
Par Value = $1,000; Maturity = 30 years; Current price = $904.70; Coupon Rate = 6.75% paid semi-annually.
a) What coupon rate should Klarion set on the bonds in order to sell them at par value?
b) Now, suppose Klarion issues the bonds at par value by setting the coupon rate on the bond equal to the rate from part (a). What is the price of the bonds expected to be in 13 years, if the required rate of return on bonds of similar risk and maturity is 8.47% at that time?
c) If Karin purchased the Klarion bonds at par value when they were issued, and sold them at the price in part (b) after 13 years, what rate of return did she realize on her investment?

Answer 1

A) when yield to maturity= coupon rate, bond will trade at par value

if coupon rate is 7.56% bond trade at par

b) value of bond in 13 th year = 918.70

c) reliazed rate = 7.16%

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