Question

Chamberlain Co. wants to issue new 16-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,035, 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?

Answer 1

The coupon rate will be 6.6415%.

Step-by-step explanation:

By using the financial calculator, the I/Y will be computed:

Where

PMT = 7/2 % × 1,000

= $35

PV = -$1,035

FV = 1,000

N = 16 × 2

= 32

It is semiannually, so the number of years got doubled.

Then press CPT and I/Y

I/Y = 3.3207

In order to compute the coupon rate, again financial calculator will be used:

PV = -$1,000

FV = $1,000

N = 32

I/Y = 3.3207

Then Press CPT and PMT

PMT = 33.2075

Coupon rate = PMT/ FV × 100

= 33.2705/ 1,000 × 100

= 3.32075%

The coupon rate will also be double:

= 3.32075% × 2

= 6.6415%

This is the annual rate.