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Part a How they have calculated the new coupon rate for the new bond …if the new bond is redeemable after 3 years why they have done tge calculation of coupon rate for 5 years i cannot understand how exactly the calculations are done
It is the existing bonds that are redeemable in 3 years time.
The paragraph of the question headed ‘financial reconstruction’ states that the new bongs will be redeemed in 5 years time.
The coupon rate is the fixed interest payable each year. The market value is the PV of the interest payments and redemption, discounted at each years relevant spot yield rate. The answer has let the coupon rate be R and then used simple algebra to calculate the value of R that makes the PV equal to the face value of $100.
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