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Sagot :
In order to sell the new bonds at par, the coupon rate must be 5.51%.
What are bonds?
- A bond is a sort of financial asset in which the issuer (the debtor) owes the holder (the creditor) a debt and is obligated to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as interest (called the coupon) over a specified period of time, depending on the terms.
To find the coupon rate in order to sell the new bonds at par:
- The company now possesses $1,000 par, 6.5 percent coupon bonds with a maturity date of 10 years and a price of $1,078.
- If we intend to issue fresh 10-year coupon bonds at par, assume that the next coupon payment is due in exactly six months for both bonds.
- We must compute the current bonds' yield to maturity (YTM).
- Because the bonds pay interest every six months, the coupon is $32.50.
- YTM = {coupon + [(face value - market value)/n]}/[(face value + market value)/2]
- YTM = {32.5 + [(1,000 - 1,078)/20]}/[(1,000 + 1,078)/2]
- YTM = 28.6 / 1,039 = 0.275 x 2 = 5.5053% ≈ 5.51%
Therefore, in order to sell the new bonds at par, the coupon rate must be 5.51%.
Know more about bonds here:
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