19. Lil Joe\'s Italian Deli, Inc. would like to open another new restaurant. The

Question

19. Lil Joe's Italian Deli, Inc. would like to open another new restaurant. They have observed that their current 10 year bonds which have a 7% coupon rate are selling for 105. If they want to finance the new restaurant with another 20 year bond issue, and wish to sell each bond for its par value of $1,000, the new bonds must have a coupon rate equal to:

a. 6.31%

b. 7.35%

c. A coupon rate above the 7% coupon on the current bonds

d. Cannot be determined from the information provided

e. None of the answers provided is correct

Explanation / Answer

Answer) With the given info lets first calculate the YTM or yield to maturity of a bond issue with 10 year maturity

N = 10

PV = -105 (Price of the bond)

FV = 100

PMT = 70

Rate = as calculated in excel = 6.31%

Now,

Using the above information we want to make sure that the YTM remains same for the bond with maturity of 20 years in excel by hit and trial method we calculate the coupon rate as 6.76%

Answer to the aove question is e) part (None of the answers provided are correct

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