Question

BDJ Co. wants to issue new 25-year bonds for some much-needed expansion projects. The company currently has 4.8 percent coupon bonds on the market that sell for $1,028, make semiannual payments, have a $1,000 par value, and mature in 25 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

Answer 1

Answer:

Coupon Rate = Market yield = 5.07%

Explanation:

For an earlier bond issue:

Present Value = $ 10248

Future Value or Maturity Value = $ 1000

Tenure ( semi annually) = 25 years * 2 = 50 Months

Coupon Rate = 4.8% paid semi annually = 2.4% = $ 24

these figures if put in financial calculator will give you an yield of 2.54% * 2 = 5.07% p.a

Now in the new issue:

Maturity = 50 months

Present Price = $ 1000

Maturity Price = $ 1000

Yield = 5.07/2 = 2.54% semi annual

will give you a coupon of 25.40 hence the yield and coupon rate has to be same for the bond issued to be sold at the par value.

Coupon Rate = Market yield = 5.07%