Shady Sunglasses Company wants to issue new 20-year bonds, with semi-annual coup

Question

Shady Sunglasses Company wants to issue new 20-year bonds, with semi-annual coupons, to fund some business expansion. The company currently has existing 8 percent coupon bonds (par value = $1,000) that sell for $1,106.78, make semi-annual payments (the next coupon payment will occur six months from today), and mature in 20 years. a) What coupon rate should the company set on its new bonds if it wants them to sell at par? b) What is the current yield of the existing bonds? c) What is the yield to maturity of the existing bonds?

Explanation / Answer

c)

a)

If the coupon rate is set at 7%, Bond will sell at par.

b)

Current yield = Annual coupon payments/Bond price

= $80/$1,106.78

= 7.23%

Face value (FV) $                                        1,000 Coupon rate 8.00% Number of compounding periods per year                                                    2 Interest per period (PMT) $                                        40.00 Bond price (PV) $                               (1,106.78) Number of years to maturity 20 Number of compounding periods till maturity (NPER)                                                  40 Bond Yield to maturity RATE(NPER,PMT,PV,FV)*2 Bond Yield to maturity 7.00%

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