Dairy Delight wants to raise $1.4 million by selling 15-year coupon bonds at par.Comparable bonds in the market have a coupon rate of 5.4 percent,semiannual payments,15 years to maturity,and are selling at 97.8 percent of par.What coupon rate should Dairy Delight set on its bonds?

Question

Quizplus · Accepted Answer

To sell at par, Dairy Delight's bonds must offer a yield equal to the market yield. The market yield can be derived from the comparable bonds selling at 97.8% of par with a 5.4% coupon rate. The yield is slightly higher than 5.4% due to the discount, so Dairy Delight should set a coupon rate slightly above 5.4%, which is 5.62%.

Dairy Delight Wants to Raise $1