Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par.Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par.What coupon rate should Warson Motors set on its bonds?

Question

Quizplus · Accepted Answer

To sell at par, Warson Motors should set a coupon rate that matches the yield of comparable bonds. The yield of the comparable bonds can be calculated using the given market price and coupon rate. Since the bonds are selling at 96.5% of par, the yield is higher than the coupon rate of 6.3%. The yield is approximately 6.62%, so Warson Motors should set a coupon rate of 6.62% to sell at par.

Warson Motors Wants to Raise $2 Million by Selling 20-Year