Bdj co. wants to issue new 19-year bonds for some much-needed expansion projects. the company currently has 8.8 percent coupon bonds on the market that sell for $1,128, make semiannual payments, have a $1,000 par value, and mature in 19 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?

Question

Business

Cesar Powell

22 December, 13:02

Bdj co. wants to issue new 19-year bonds for some much-needed expansion projects. the company currently has 8.8 percent coupon bonds on the market that sell for $1,128, make semiannual payments, have a $1,000 par value, and mature in 19 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?

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Answers (1)

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Elizabeth Walton · Answer 1

7.75%

Explanation:

We are given the present and future value of the bonds, the payments, and the number of payments, but we must determine the discount rate. Since I like to use excel, I will prepare a payment a series of cash flows to determine the internal rate of return:

initial cash flow = - 1,128 37 cash flows = 88 38th cash flow = 1,088

using the IRR function:

=IRR (-1128,88 ... 37 times, 1088) = 7.75%

In order for Bdj Co. to be able to sell their bonds at par value, they should offer a 7.75% coupon rate.