Question

Blue Co. issued 30-year bonds twelve years ago which are currently trading at $1,187 and have a face value of $1,000. An investor’s required rate of return on similar debt is 8.5% and the coupon payments are paid semiannually. What is the original issue coupon rate for this bond?

Answer 1

Face Value = $1000

Current Price = $ 1187

No of years left to maturity = 18 years

Required Return on Similar Debt = 8.5%

Calculating the Coupon Price of the Bond:

n = 18*2 = 36

Semi-annual YTM = 8.5%/2 =4.25%

$1187 = Coupon payment(18.2708) + $ 223.49

$ 963.51 = Coupon payment(18.2708)

Coupon payment = $ 52.735

So, Annual Coupon payment = $52.73*2 = 105.47

Issue Coupon rate = $105.47/$1000 = 10.547%

So, original issue coupon rate for this bond is 10.55%

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