Question

12. In November of 2017, Chinese e-commerce company Alibaba Group Holding Ltd. sold $7 billion in U.S.-dollar bonds, its second visit to the debt markets in three years. The company sold bonds with maturities ranging from 5.5 years to 40 years. Alibaba issued some semiannual coupon bonds at par. Comparable bonds have a current yield of 8.16 percent, an effective annual yield of 8.68 percent, and a yield to maturity of 8.50 percent. What coupon rate should Alibaba set on its bonds? A. 8.16 percent B. 8.50 percent C. 8.55 percent D. 8.68 percent E. 9.00 percent

Answer 1

Alibaba should set a coupon rate of 8.50 percent on its bonds because it has issued bonds at par. The coupon rates of  bonds issued at par will be equal to the yield to maturity.

Option B is correct: 8.50 percent

Only the bonds issued below par will have coupon rate less than yield to maturity, so option A is incorrect.

Only the bonds issued above par will have coupon rate greater than yield to maturity, so options C, D, and E are incorrect.

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