Question

Market Enterprises would like to issue $1,000 bonds and needs to determine the approximate rate it would need to pay investors. A firm with similar risk recently issued bonds with the following current features: a 5% coupon rate, 10 years until maturity, and a current price of $1,170.50. At what rate would Market Enterprises expect to issue bonds, assuming annual interest payments? Please round to the closest answer. (Solve this problem using either Excel's "Goal Seek" function, plug into tvm tables, or a financial calculator.)

Answer 1

Answer:

It will use a 3% rate

Explanation:

We need to solve for the discount rate which makes the coupon payment and maturity of the similar bond equal their current market value of 1,170.50

This is done using excel goal seek tool:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 50.00 (1,000 x 5%)

time 10 years

rate 0.030011

$50 \times \frac{1-(1+0.030011)^{-10} }{0.030011} = PV$

PV $426.4860

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   1,000.00

time   10.00

rate  0.030011071

$\frac{1000}{(1 + 0.030011)^{10} } = PV$  

PV   744.01

PV c $426.4860

PV m  $744.0139

Total $1,170.5000

market rate  = 0.030011071 = 3%

The procedure will be to build up the formulas and link the rates to a cell.

and then, click on the total cell and use goal seek changing the rate cell