Chamberlain Company wants to issue new 16-year bonds for some much-neededexpansion projects. The company currently has 8.0 percent coupon bonds on themarket that sell for $718.32, make semiannual payments, and mature in 16 years. Whatcoupon rate should the company set on its new bonds if it wants them to sell at par?Assume a par value of $1,000.Multiple Choice12.00%12.30%6.00%11.70%

If the current price and par value of the bond are equal, then the bond is trading at par because…

Answered: Chamberlain Company wants to issue new…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 1PROB

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Bond Valuation and Changes in Maturity and Required Returns Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a 1,000 par value, a 10% coupon rate, and semiannual interest payments. a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell? b. Suppose that 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell? c. Suppose that 2 years after the issue date (as in Part a) interest rates fell to 6%. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?
Yield to Maturity and Yield to Call Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 109% of face value (call price = $1,090). What is the yield to maturity? What is the yield to call if they are called in 5 years? Which yield might investors expect to earn on these bonds, and why? The bond’s indenture indicates that the call provision gives the firm the right to call them at the end of each year beginning in Year 5. In Year 5, they may be called at 109% of face value, but in each of the next 4 years the call percentage will decline by 1 percentage point. Thus, in Year 6 they may be called at 108% of face value, in Year 7 they may be called at 107% of face value, and so on. If the yield curve is horizontal and interest rates remain at their current level, when is the latest that investors might expect the firm to call the bonds?

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