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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

EXPECTED INTEREST RATE Lloyd Corporation’s 14% coupon rate, semiannual payment. $1,000 par value bonds, which mature in 30 years, are callable 5 years from today at $1,050. They sell at a price of $1,353 54, and the yield curve is flat. Assume that interest rates are expected to remain at their current level.

  1. a. What is the best estimate of these bonds' remaining life?
  2. b. If Lloyd plans 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?

a.

Summary Introduction

To identify: The remaining life of the bonds.

Expected Interest Rate: It refers to the rate of interest expected by the investors. It is affected by many factors like market performance.

Explanation
  • Bonds will be called because the bonds are sold at a premium, which means current rate is more than coupon rate...

b.

Summary Introduction

To identify: Coupon rate to issue new bonds at par.

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