Baxter Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 5.6 percent coupon bonds on the market that sell for $1,094.30,page 160 make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par

The coupon rate the company should set on its new bonds if it wants them to sell at par is 4.86%.

Explanation:

The coupon rate can be determined by calculating the yield to maturity (YTM) using the following RATE function in Excel:

YTM = RATE(nper,pmt,-pv,fv) * Number of semiannuals in a year = RATE(nper,pmt,-pv,fv)*2 (1)

Where;

YTM = yield to maturity = ?

nper = number of periods = number of years to maturity * number of semiannuals in a year = 20 * 2 = 40

pmt = semiannual coupon payment = face value * (annual coupon rate / number of semiannuals in a year) = 1000 * (5.6% / 2) = 28

pv = present value = current bond price = $1,094.30 = 1094.30

fv = face value of the bond = 1000

Substituting the values into equation (1), we have:

YTM = RATE(40,28,-1094.30,1000)*2

Inputting =RATE(40,28,-1094.30,1000)*2 into excel (Note: as done in the attached excel file), we have

YTM = 4.86%

Therefore, the coupon rate the company should set on its new bonds if it wants them to sell at par is 4.86%.

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