Microgates Industries Case Study
1. How does a bond issuer decide on the appropriate coupon rate to set on its bond? Explain the difference between the coupon rate and the required return on a bond.
A required rate of return is the figure needed to induce investors or companies to invest in something. A coupon rate describes is the amount of interest paid per year expressed as a percentage of the face value of the bond. It is the interest rate that a bond issuer pays to a bondholder. The bond issuer decides on an attractive return rate that would entice investors.
2. A Microgates Industries bond has a 10% coupon rate and a $1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12% yield, what’s the bond’s value? What
is the effective annual yield on the bond?
Bond Value= $50 x (1-1/1.06^40) /.06+ 1,000/1.06^40 $50 x 15.04630 + 1,000/10.2857 = $849.54
Effective Annual Yeild= 1.06^2-1= 12.36%
3. A Microhard Corp. bond carries an 8% coupon, paid semiannually. The par value is $1,000, and the bond matures in 6 years. If the bond currently sells for $911.37, what is its yield to maturity? What is the effective annual yield?
$40 x (1-1/1.06^12)/.06+ 1,000/1.06^12
=$832.32
Yield between 8-12%
1.05^2-1=10.25%
A required rate of return is the figure needed to induce investors or companies to invest in something. A coupon rate describes is the amount of interest paid per year expressed as a percentage of the face value of the bond. It is the interest rate that a bond issuer pays to a bondholder. The bond issuer decides on an attractive return rate that would entice investors.
2. A Microgates Industries bond has a 10% coupon rate and a $1,000 face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12% yield, what’s the bond’s value? What
is the effective annual yield on the bond?
Bond Value= $50 x (1-1/1.06^40) /.06+ 1,000/1.06^40 $50 x 15.04630 + 1,000/10.2857 = $849.54
Effective Annual Yeild= 1.06^2-1= 12.36%
3. A Microhard Corp. bond carries an 8% coupon, paid semiannually. The par value is $1,000, and the bond matures in 6 years. If the bond currently sells for $911.37, what is its yield to maturity? What is the effective annual yield?
$40 x (1-1/1.06^12)/.06+ 1,000/1.06^12
=$832.32
Yield between 8-12%
1.05^2-1=10.25%