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Dillards just issued bonds with a $1,000 par value. The bonds are currently trading at $1,020 per bond. The bonds have a 7%
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Answer #1

HI

Here Current Price P = $1,020

Semi annual YTM r= 7%/2 = 3.5%

Coupon C=?

Time to maturity t = 20 years = 40 semiannual

Bond price P = C/r*(1-(1+r)^-t + F/(1+r)^t

1020 = C/ 3.5%*(1-1.035^-40) + 1000/1.035^40

1020 =(C/3.5%)* 0.75 + 1000/3.96

1020 = C*21.36 + 252.57

C*21.36 = 767.43

C = 35.94 = 3.59% (Semiannual)

Annual Coupon rate = 2*3.59% = 7.19%

Hence None of the above is correct.

Thanks

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