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?
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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