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Pandora media plans to issue original issue discount bonds with a 20 year maturity $1000 par value and initial tells to maturity of 8%. Since these bonds are issued below par the total yield will come from both annual coupon payments and appreciation. If the bonds are offered at a discounted price of $830 what is their nominal coupon rate? That is at what coupon rate will result in a yield to maturity of 8%?

Pandora media plans to issue original issue discount bonds with a 20 year maturity $1000 par value and initial tells to maturity of 8%. Since these bonds are issued below par the total yield will come from both annual coupon payments and appreciation. If the bonds are offered at a discounted price of $830 what is their nominal coupon rate? That is at what coupon rate will result in a yield to maturity of 8%?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Pandora media plans to issue original issue discount bonds with a 20 year maturity $1000 par value and initial tells to maturity of 8%. Since these bonds are issued below par the total yield will come from both annual coupon payments and appreciation. If the bonds are offered at a discounted price of $830 what is their nominal coupon rate? That is at what coupon rate will result in a yield to maturity of 8%?
Expert Solution
Step 1: Analysis

Bond price will be equal to sum of present value of all coupon payments and present value of face value.

Bond price = PV of all coupons + PV of face value

                   equals C open curly brackets fraction numerator 1 minus 1 over left parenthesis 1 plus i right parenthesis to the power of n over denominator i end fraction close curly brackets space plus space fraction numerator F V over denominator left parenthesis 1 plus i right parenthesis to the power of n end fraction

where

C =Annual coupon

i = yield to maturity

n = years to maturity

FV = Face value


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