You work at an investment bank and are advising a firm that wishes to issue a 10 year bond. You have researched other similar firms and have found that bonds issued by those other companies tend to pay on average a 6% coupon and have a 9% yield to maturity. The company wishes to mimic these companies and issue a bond with a $100 face value and annual coupon with an APR of 6%.

a. How much would you tell your client they should expect to be able to sell each bond for?

b. Your client is disgusted at the idea of their bonds trading at a discount thinking it signifies financial weakness and makes borrowing more expensive. What is the lowest coupon rate you could suggest that you would expect the bond to not trade at a discount?

c. What do you think of your clients reasoning that the a lower coupon rate makes borrowing more expensive? What are some real consequences (what actually changes) if they select the higher coupon rate.

Answer rating: 100% (QA)

a To determine the expected selling price of each bond we need to calculate the present value of the bonds future cash flows The bond has a face value ... View the full answer