Question

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?

- 4.38%
- 8.75%
- 4.56%
- 8.49%
- 9.12%

Answer #1

Information provided:

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:

FV= 1,000

N= 16

PV= -1,014

CPT= 45

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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