Question

Seether Co. wants to issue new 15-year bonds for some much needed expansion projects. The company currently has 10.6 percent coupon bonds on the market that sell for $1,000.00, make semiannual payments, and mature in 15 years. What coupon rate should the company set on its new bonds if it wants them to sell at par

Answer 1

Answer: 10.6%

Explanation:

The bond is already selling in the market at Par. This means that the current coupon rate is the right one to sell it at if the company wants to sell at par.

We can prove this however.

If the company wants to sell the bonds at par, it will have to issue at a coupon rate that is the equivalent of the Yield to maturity because bonds are issued at par when the YTM and the Coupon rate are equal.

To find the rate, use an excel worksheet or a financial calculator.

Present Value = -1,000

Number of periods = 15 * 2 = 30 semi annual periods

Payment/ PMT = (10.6% * 1,000) / 2 = 106/2 = $53

Future Value/ FV = Par value of $1,000

Rate = 5.3%

Make it an annual figure = 5.3 * 2 = 10.6%