Answer: 8.62%
Explanation:
Based on the information given, the coupon rate on the new bonds if the firm wants to sell them at par will be calculated thus:
The following information can be gotten from the question:
Par Value = $1,000
Current Price = $994
Time to Maturity = 7 years
Annual Coupon Rate = 8.50%
Semiannual Coupon Rate = 8.50%/2 = 4.25%
Semiannual Coupon = 4.25% × $1,000 = $42.50
Semiannual Period to Maturity = 7/½ = 14
Let the semiannual Yield to maturity be represented by x Therefore,
994 = 42.50 × PVIFA(x, 14) + 1,000 × PVIF(x, 14)
Then, we'll use the financial calculator where,
N = 14
PV = -994
PMT = 42.50
FV = 1000
Based on this, the value of x will be 4.308%.
Since the Semiannual YTM is 4.308%, then the Annual YTM will be:
= 2 × 4.308%
= 8.616%
= 8.62%
Therefore, the coupon rate should be 8.62%
