What must the coupon rate of the new bonds ?
On January 1, 2002, HomeSafe Cab Co. will issue new bonds to finance its expansion plans. Currently outstanding 8%, January 1, 2017 HomeSafe bonds 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?
SAMPLE SOLUTION:
Given that semiannually the coupon is paid to the bond holders.
Coupon Rate: 8% annually
Coupon paid semiannually = $ 40
Present Value of Bond: $ 1091.96
Par Value of Bond: $ 1000
Now the bond is selling at premium because the present value is higher than the par value of the bond.
Now the Equation becomes
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