Dry Seal plans to issue bonds to expand operations.The bonds will have a par value of $1,000,a 10-year maturity,and a coupon interest rate of 9%,paid semiannually.Current market conditions are such that the bonds will be sold to net $937.79.The yield-to-maturity of these bonds is 10%.

Question

Quizplus · Accepted Answer

The fact that the bonds are sold at a price lower than their face value ($937.79 vs $1,000) indicates that the market yield is higher than the coupon rate. Therefore, the yield-to-maturity should be higher than 9%, not lower. In this case, the yield-to-maturity is stated to be 10%, which is higher than the coupon rate, so the bonds are priced to yield a return that is in line with current market conditions.

Dry Seal Plans to Issue Bonds to Expand Operations