PGP Co. expects to issue a $1,000 face-value bond that matures in 8 years. The annual coupon rate is 9%, and interest payments are expected to be paid semiannually. Similar bonds are currently priced at 101.4% of face value. Given this information, what is the required return by bondholders?
Face value= future value= $1,000
Current value= present value= 101.4%*1,000= $1,014
Time= 8 years*2= 16 semi-annual periods
Coupon rate= 9%/2= 4.5% per semi-annual period
Coupon payment= 0.045*1,000= $45
The required return is calculated by computing the yield to maturity,
Enter the below in a financial calculator to compute the yield to maturity:
Press the CPT key and I/Y to compute the yield to maturity.
The value obtained is 4.3765.
Therefore, the yield to maturity is 4.3765%*2= 8.7530% 8.75%.
Hence, the answer is option b.
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