Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

Question

Quizplus · Accepted Answer

To sell at par, the new bond issue must have a price of $1,000, the same as the face value.

We can set up the equation:
Price of the similar bond = Price of the new bond
$1,091.96 = Coupon payment / (1 + r) + Coupon payment / (1 + r)^2 + ... + Coupon payment / (1 + r)^10 + Face value / (1 + r)^10

Solving for the coupon rate (r) using trial and error or using financial calculator gives us a answer of 6.71%.

Zheng Corporation Plans to Issue New Bonds to Finance Its