Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

Coupon rate should be 8.6%

Explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

Face value = F = $1,000

Coupon payment = $1,000 x 8.5% / 2 = $42.5

Selling price = P = $994

Number of payment = n = 14 years x 2 = 28 payment

Yield to maturity = [ 42.5 + ($1,000 - 994) / 28 ] / [ ($1,000 + 994) / 2 ]

Yield to maturity = [ 42.5 + ($1,000 - 994) / 28 ] / [ 1,994) / 2 ]

Yield to maturity = [ $42.5 + $0.21 ] / $997 = $42.71 / $997 = 0.043 = 4.3%

Yield to maturity = 4.3% x 2 = 8.6% per year