HUS Enterprises would like to raise $40 million to invest in capital expenditures. The company plans to issue 10-year bonds for this purpose. The company is evaluating two issue alternatives: a bond paying coupons annually and a zero coupon bond. Both bonds will have a par value of $1,000. The company also believes it can get a rating of AA from Standard & Poor’s. The 10-year U.S. Treasury bond has a yield to maturity of 6.5% and the yield spread on 10-year AA-rated corporate bonds is 0.4%.

i. What coupon rate should the company set on its new coupon bonds if it wants them to sell at par?

ii.What is the issue price of zero coupon bond?

Answer rating: 100% (QA)

i To find the coupon rate we need to use the formula for present value of a bond PV C r x 1 1 rn F 1 ... View the full answer