Question

Seether Co. wants to issue new 17-year bonds for some much-needed expansion projects. The company currently has 7.0 percent coupon bonds on the market that sell for $961.66, make semiannual payments, and mature in 17 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

rev: 09_18_2012

Multiple Choice

• 7.70%

• 7.40%

• 7.10%

• 7.30%

• 3.70%

Answer 1

Yield to maturity of the bond is calculated using the RATE function as follows:

=RATE(nper,pmt,pv,fv)

=RATE(17*2,7%/2*1000,-961.66,1000)*2

=7.40%

The company should set the coupon rate at current yield to maturity at 7.40%