If Circular File (see question 4) wants to issue a new 6-year bond at face value, what coupon rate must the bond offer?
If Circular File (see Question 4) Wants To Issue A New 6-year Bond At Face Value, What Coupon Rate Must The Bo
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I dont have your question in front of me, but I will give you some theory of bond pricing.
Ok, so the price of the bond is the present value of the face face value of the bond and the interest annuity discounted at the MARKET rate of interest. The higher the discount rate..the LOWER the bond price right….
Keep this in mind, because it leads to the most important thing you need to know for BONDS, that if interest rates go up, bond prices down!!!.. Because if you Discount at a higher market rate, the present value, or the bond price will go down.
OK so you issue a bond with an interest rate of 10%. Market interest rates are 4%. . OK will this bond trade at a premium or discount!!! Well the price is determined by using the MARKET rate as the discount rate…and since the market rate is LOWER than your coupon rate…the bond will trade at a premium!!! Also, think logically. If you offer 10% while the market is offering 4%, obviously your bonds will trade at premiums. or more than the face value. The buyer will have to PAY more to get a higher return!!!
Now, to your question. IF they want to issue a bond at face value, that means PAR, and that also mean that the rate they issue that bond at must be exactly equal to the market rate!!
Therefore, you must have been given a market rate to work with, or else you wont be able to answer the question.
Remember if the market rate and coupon rate are different, the bond will always trade at a premium or discount.
If the market rate=coupon rate, bond will trade at par or face value.