Question

You are CFO of Martingale Industries. Martingale currently has unsecured debentures that mature 12 years from now. The bonds have a $1000 face value, an annual coupon rate of 7.4%, and coupons are paid annually. The price of the bonds today is $1138. You now wish to sell new 12-year unsecured debentures and you want the new bonds to sell at their par value of $1000. What coupon rate do you need to set on the new issue? Assume that for both bond issues the next coupon payment will occur one year from now.

Answer 1

To sell the new 12-year unsecured debentures at par value, the coupon rate must be equal to the yield to maturity of the bonds, which is currently 5%.

To find the coupon rate for the new bond issue, we can use the following formula:

Coupon rate = Yield to maturity + [(Face value - Price) / (Face value x Years to maturity)]

Plugging in the numbers, we get:

Coupon rate = 5% + [(1000 - 1138) / (1000 x 12)]

Coupon rate = 5% + [-0.0118]

Coupon rate = 4.99%

Therefore, the coupon rate on the new 12-year unsecured debentures should be set at 4.99% to sell the bonds at their par value of $1000.