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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

EXPECTED INTEREST RATE Lourdes Corporation’s 12% coupon rate, semiannual payment, $1,000 par value bonds, which mature in 25 years, are callable 6 years from today at $1,025. They sell at a price of $1,278.56, 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 Lourdes 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 estimation of 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 after 6 years because these are sold at a premium, which means coupon rate is higher in comparison to current interest rate...

b.

Summary Introduction

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

Expected Interest Rate:

It refers to the rate of interest expected by the investors it is affected by many factors like market performance.

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