BDJ Co. wants to issue new 21-year bonds for some much-needed expansion projects

Question

BDJ Co. wants to issue new 21-year bonds for some much-needed expansion projects. The company currently has 10.1 percent coupon bonds on the market that sell for $1,141, make semiannual payments, and mature in 21 years.

What coupon rate should the company set on its new bonds if it wants them to sell at par? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What coupon rate should the company set on its new bonds if it wants them to sell at par? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Coupon Rate of the New Issue can be set equal to the Yield to Maturity of the Existing Bond.

YTM of the Existing Bond: c(1 + r)-1 + c(1 + r)-2 + . . . + c(1 + r)-Y + B(1 + r)-Y = P

P = Price = 1,141, c = Coupon Payment, r = ?, B = Maturity Value = 1,000, Y = Years = 21 Years

By putting Value in the Equation:

1,141 = 55 (1+ r)-1 + 55 (1+r)-2........

We get YTM of existing Bond is: 8.63%

So, the coupon rate for the new bonds can be set at 8.63%.

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