Check My Work (3 remaining) Click here to read the eBook: Bond Valuation Click h
ID: 2616783 • Letter: C
Question
Check My Work (3 remaining) Click here to read the eBook: Bond Valuation Click here to read the eBook: Bonds with Semiannual Coupons EXPECTED INTEREST RATE e 0 | Lourdes Corporation's 13% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 10 years, are callable 6 years from today at $1,025. They sell at a price of $1,323.10, 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 two decimal places. 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. Since Lourdes wishes to issue new bonds at par value, the coupon rate set should be the same as that on the existing bonds. II. Since Lourdes wishes to issue new bonds at par value, the coupon rate set should be the same as the current yield on the existing bonds. III. Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate. IV. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC. V. Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM Check My Work (3 remaining) 5 6 2Explanation / Answer
a. The answer will be “6 years”
The coupon rate of the bond is 13% and this is higher than the current interest rate which is expected to stay at a constant level. Due to this fact Lourdes will opt to call the bonds rather than let them remain outstanding until they mature.
b. N = 6*2 = 12. PMT = 0.13/2*1000 = $65
Uses excel to find the coupon rate. N = 12, PV = -1323.10, PMT = 65, and FV = 1025.
The function that will be used is “rate” and we get the rate as 3.3571. But this will have to be multiplied with 2 to convert it into an annual rate.
So the coupon rate = 3.3571%*2 = 6.71%
Bonds are selling at a premium (its selling at $1,323.10) and so the coupon rate should be set at the going rate, which is the yield to call (YTC).
Hence the answer is option “IV”.