On January 1, 2002, Zheng Corporation Will Issue New Bonds

question 118

Multiple Choice

On January 1, 2002, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate that is due January 1, 2017. This firm's bonds currently are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

• A) 5.75%
• B) 6.00%
• C) 6.50%
• D) 7.00%

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Definitions:

Loan

A form of financial agreement in which one party lends money to another, with the expectation that the money will be paid back with interest.

Interest Rate

The cost of borrowing money, expressed as a percentage of the amount borrowed.

Opportunity Cost

Opportunity cost is the cost of the opportunity forgone to pursue one option instead of another, representing the benefits an individual, investor, or business misses out on when choosing one alternative over another.

Investment

The allocation of resources, usually monetary, into assets or projects expected to generate future profits or income.