Question

Your company currently has $ 1000 ​par, 6.5 % coupon bonds with 10 years to maturity and a price of $ 1,080. If you want to issue new​ 10-year coupon bonds at​ par, what coupon rate do you need to​ set? Assume that for both​ bonds, the next coupon payment is due in exactly six months.

You need to set a coupon rate of _____%

Answer 1

Because the coupon payment is due in six months, the payment frequency is semi-annually.

To find the coupon rate to be set we first need to find the yield on the current bond.

For the current bond:

N(Number of periods) = 10*2 = 20

PV = -$1,080

FV = $1000

PMT = 1000 * 6.5%/2 = $32.5

Using the RATE function in excel:

Yield = 0.0272 * 2 = 0.0544 = 5.44%

Because the new 10-year coupon bonds are to be issued at par, the coupon rate should be equal to the yield. Because the yield is 5.44%, the coupon rate should be 5.44%