Question

P7-22 Bond Yields [LO2] Chamberlain Co. wants to issue new 16-year bonds for some much-needed expansion projects. The company currently has 8.6 percent coupon bonds on the market that sell for $1,072.41, 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.

a) 7.80%

b) 8.10%

c) 7.50%

d) 3.90%

e) 7.70%

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =16x2

1072.41 =∑ [(8.6*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^16x2

k=1

YTM% = 7.8

to set bond at par coupon rate has to be equal to market rate = 7.8%