BDJ Co. wants to issue new 18-year bonds for some much-needed expansion projects
ID: 2684182 • Letter: B
Question
BDJ Co. wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 9.9 percent coupon bonds on the market that sell for $1,139, make semiannual payments, and mature in 18 years.Required:
What coupon rate should the company set on its new bonds if it wants them to sell at par? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Coupon rate %
Explanation / Answer
The yield to maturity on the current bonds can be calculated as follows Semiannual coupon = 0.099 / 2 * 1000 = $49.5 Cash flows are as follows Periods 1 to 35 = $49.5 Period 36 = 1049.5 Period 0 = present value of the bond = -1125 1125= 49.5PVIFA(YTM,36)+1000PVIF(YTM,36) YTM= 4.19x2= 8.38% The new bond should be issued at 8.38% if it is to be sold at par since this is the required return on a similar bond.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.