Coccia Co. wants to issue new 16-year bonds for some much-needed expansion proje

Question

Coccia 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?

Coccia 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.

Explanation / Answer

here price of bond = $1035

, n= 16*2 =32 semi annual payments

semi annual coupon payment =7%/2*1000 =$35

for new bonds if it wants them to sell at par , coupon rate must be equal to YTM

so we have to find YTM

=> 1035 = 35/(1+r)+35/(1+r)^2+----+35/(1+r)^32+1000/(1+r)^32

solving for r we get r=3.32% ( semi annual)

so annual YTM =3.32%*2 = 6.64%

so it must set coupon rate =6.64% to sell at par

ans:6.64%

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