Fundamentals of Financial Management. Expected interest rate Problem. 14% ccoupon rate, semiannual pmt....?

Question

14% coupon rate, semiannual pmt, $1000 par value bonds, which matures in 30 yrs, are callable 5 yrs from today at $1050.00. They sell at a price of $1353.54. yield curve is flat, assume interest rates stay current level.

A. What is the best estimate of these bonds' remaining life?
B. If they plan to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

14% coupon rate, semiannual pmt, $1000 par value bonds, which matures in 30 yrs, are callable 5 yrs from today at $1050.00. They sell at a price of $1353.54. yield curve is flat, assume interest rates stay current level.

A. What is the best estimate of these bonds' remaining life?
B. If they plan to raise additional capital and wants to use debt financing, what coupon rate would it have to set in order to issue new bonds at par?

I need step by step or breakdown....thanks

Answer 1

Since the price is a premium (above Par), the yield is less than the coupon. That means that the company is likely to call the bond as soon as possible. Therefore, they will probably be called in five years.

So the answer to A is "5 years."

If rates stay the same and the yield curve is flat, the company should be able to issue new bonds with a coupon rate equal to the yield of this bond. You need to find the yield of this bond. You know that the price is 1252.54 and that it has cash flows of $70 every six months for 4.5 years and a final cash flow of $1120 (the last $70 coupon plus the $1050 price). That gives you enough information to find the yield.