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Lourdes Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 30 years, are callable 6 years from today at $1,025. They sell at a price of $1,331.28, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

a. What is the best estimate of these bonds' remaining life? Round your answer to the nearest whole number.
years

b. If Lourdes plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

1 Answer

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Final answer:

The estimated remaining life of Lourdes Corporation's bonds is 6 years if they're callable and interest rates are stable. To issue new bonds at par, Lourdes would need to set a coupon rate equal to the current market interest rate that matches the yield to maturity of the existing bonds, which depends on the current market conditions.

Step-by-step explanation:

The question involves estimating the remaining life of Lourdes Corporation's bonds and determining the coupon rate for potential new bonds to be issued at par. For the remaining life estimate, as the bonds are callable in 6 years at a price of $1,025, the best estimate is that if the yield curve is flat and interest rates are expected to remain at their current level, the company may choose to call them at the earliest opportunity, which means in 6 years.

As for the coupon rate that Lourdes would have to set for new bonds, it would depend on the current market interest rates. If the yield curve remains flat and the market interest rate is the same as the yield to maturity of the current bonds, then the coupon rate for new bonds issued at par should be set at the same yield to maturity.

To determine this exactly, the yield to maturity would need to be calculated using the current selling price and payment structure of the existing bonds, which has not been provided in the question. However, it can be generally stated that new bonds should offer an interest rate that is considered attractive and competitive at the current market rate to entice investors.

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