Problem
Evergreen Inc. has issued a semi-annual coupon bond. The bond has a $1000 face value, a 10% coupon rate, and matures in 8 years. The current annual yield-to-maturity for all bonds of the company is 7% (note: this is APR).
A. What is the semi-annual coupon amount?
B. What is the price of this bond?
C. What is the current yield of this bond?
Next, suppose Evergreen believes that its current share price is undervalued and considers buying back shares. To do this, Evergreen issues a zero-coupon bond that matures in 5 years and uses the proceeds to buy back shares. The firm decides to buy back 10,000 shares for now. The current stock price of Evergreen is $30, and assume the buyback decision does not change the stock price. Assume the effective annual rate (EAR) that can be used to discount this new zero-coupon bond is 7.12% (same as that of the existing bonds).
D. What is the total face value of the zero-coupon bond that Evergreen needs to issue?