On January 1, 2002, Zheng Corporation will 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 that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If interest is paid semiannually 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 coupon rate must equal the yield to maturity (YTM) of the comparable bond. The comparable bond's YTM can be calculated using its current price, coupon rate, and time to maturity. Given the bond's price of $1,091.96, a coupon rate of 8%, and 15 years to maturity, the YTM is approximately 7%. Therefore, the new bonds must have a coupon rate of 7% to sell at par.

On January 1, 2002, Zheng Corporation Will Issue New Bonds