Answer:
He should set coupon rate of 1.98%
Explanation:
Given Data:
Face Value of Bonds = $2,000,000
Coupon rate = 6.3 percent
Issue Value of Bonds = 6.5% * Face Value of Bonds
= 6.5% * $2,000,000
= 0.065 * $2,000,000
= $130,000
Given Annual YTM = 6.30%
Therefore,
Semiannual YTM = 3.15%
Time to Maturity = 20 years
Semiannual Period = 40
Let Semiannual Coupon be $C
$130,000 = $C * PVIFA(3.15%, 40) + $2,000,000
$130,000 = $C * (1 - (1/1.0315)^40) / 0.0315 + $2,000,000 / 1.0315^40
$130,000= $C * 22.56 + $578,443.2
$448,443.2 = $C * 22.56
$C = $19877.80
Semiannual Coupon = $19877.80
Semiannual Coupon Rate = Semiannual Coupon / Face Value of Bonds
Semiannual Coupon Rate = $19877.80 / $2,000,000
Semiannual Coupon Rate = 0.0099 or 0.99%
Annual Coupon Rate = 2 * Semiannual Coupon Rate
Annual Coupon Rate = 2 * 0.99%%
Annual Coupon Rate = 1.98%
