Lloyd Corporation\'s 14% coupon rate, semiannual payment, $1,000 par value bonds

Question

Lloyd Corporation's 14% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 25 years, are callable 6 years from today at $1,050. They sell at a price of $1,391.08, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

What is the best estimate of these bonds' remaining life? Round your answer to two decimal places.
  years

If Lloyd plans to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTC.

Since the bonds are selling at a premium, the coupon rate should be set at the going rate, which is the YTM.

Since Lloyd wishes to issue new bonds at par value, the coupon rate set should be the same as that on the existing bonds.

Since Lloyd wishes to issue new bonds at par value, the coupon rate set should be the same as the current yield on the existing bonds.

Since interest rates have risen since the bond was first issued, the coupon rate should be set at a rate above the current coupon rate.

Explanation / Answer

Since the price is a premium (above Par), the yield is less than the coupon. That means that the company is likely to call the bond as soon as possible. Therefore, they will probably be called in five years.

So the answer to A is "5 years."

If rates stay the same and the yield curve is flat, the company should be able to issue new bonds with a coupon rate equal to the yield of this bond. You need to find the yield of this bond. You know that the price is 1391.08 and that it has cash flows of $70 every six months for 4.5 years and a final cash flow of $1120(the last $70 coupon plus the $1050 price). That gives you enough information to find the yield.

RATE(12,70,-1391.08,1120,0,0) =3.71%

Since Lloyd wishes to issue new bonds at par value, the coupon rate set should be the same as the current yield on the existing bonds.

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