Sampson Inc. wants to issue new 10-year bonds. The company currently has 7 perce

Question

Sampson Inc. wants to issue new 10-year bonds.   The company currently has 7 percent coupon bonds on the market that sell for $1,036.35 (par value = $1,000), make semi-annual payments, and matures in 10 years.  

a) What coupon rate (paid semi-annually) should the company set on its new bonds if it wants them to sell at par?

b) Hacker Software has 6.2 percent coupon bonds on the market with 4 years to maturity. The bonds make semi-annual payments and currently sell for 105 percent of par. What is the yield to maturity on the bonds?

Please fully answer the question and show your work

Explanation / Answer

1.
Yield on current bonds:
Using financial calculator:
FV=1000
PMT=7%/2*1000=35
N=10*2=20
PV=-1036.35
CPT I/Y=3.25%
Hence, yield to maturity ytm on current bonds=3.25%*2=6.5%

To sell a bond at par, coupon rate must be equal to ytm
Hence, new bonds should have coupon rate of 6.5% paid semi-annually ojn new bonds

2.
Using financial calculator:
FV=1000
PMT=6.2%/2*1000=31
N=4*2=8
PV=-105%*1000=-1050
CPT I/Y=2.41%
Hence, yield to maturity ytm =2.41%*2=4.82%

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