Question

Chamberlain Co. wants to issue new 16-year bonds for some much-needed expansion projects. The company currently has 8.2 percent coupon bonds on the market that sell for $1,055.01, make semiannual payments, and mature in 16 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000.

Multiple Choice

a) 7.50%

b) 7.30%

c) 7.60%

d) 7.90%

e) 3.80%

Answer 1

No of semi-annual coupon payments (N) = 32 (16 years x 2)
Face Value (Future Value) = $1000
Price of bond (PV) = -$ 1055.01

Semi-annual coupon amount (PMT) = $1000 x 8.20% x 6 / 12 = $41

Using financial calculator or Rate function in excel,

Yield to maturity of bond (Y) = 3.80 per semi-annum = 7.60% p.a.

When yield to maturity = coupon rate, price of bond is equal to its par value.

Therefore company should set it's coupon at 7.60% p.a. if it wants it's bond to trade at par.

Therefore option c is correct

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