Question

The Juice Co. wants to raise a million dollars by selling some coupon bonds at par. Comparable bonds in the market have a 6 percent semi-annual coupon, 8 years to maturity, and are selling at 96.9 percent of par. What coupon rate should the Juice Co. set on their bonds?

Select one:

a. 3.25 percent

b. 6.50 percent

c. 6.00 percent

d. 4.85 percent

Answer 1

Answer is 6.50 percent

Face Value = $1,000

Current Price = 96.90% * $1,000
Current Price = $969

Annual Coupon Rate = 6.00%
Semiannual Coupon Rate = 3.00%
Semiannual Coupon = 3.00% * $1,000
Semiannual Coupon = $30

Time to Maturity = 8 years
Semiannual Period to Maturity = 16

Let Semiannual YTM be i%

$969 = $30 * PVIFA(i%, 16) + $1,000 * PVIF(i%, 16)

Using financial calculator:
N = 16
PV = -969
PMT = 30
FV = 1000

I = 3.25%

Semiannual YTM = 3.25%
Annual YTM = 2 * 3.25%
Annual YTM = 6.50%

Therefore, Juice Co. should set its coupon rate at 6.50% on their bonds in order to sell them at par.