Question

Your company wants to raise capital by selling 20yr maturity bonds. The bonds have a par...

Your company wants to raise capital by selling 20yr maturity bonds. The bonds have a par value of $1,000 and will pay interest semi-annually. Based on the current market situation, investors ask 11% interest. If your company wants to sell $1,200 per bond, how much coupon interest will you have to attach to the bonds?
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Answer #1
n = 40
I = 5.50%
Par value 1000
Interest semi annual be x
Annuity PVF at 5.50% for 40periods 16.04612
PVF at 5.50% fr 40th period 0.117463
Present value of interest 16.04612x
Present value of maturity 117.463
Price of bonds 117.46+16.04612x
As per question, equation:
1200 = 117.46 + 16.04612x
x= 67.46
Semi annual interest rate = 67.46/1000*100 = 6.75%
Annual Coupon rate = 6.75*2 = 13.50%
Answer is 13.50%
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