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Why the coupon rate is equal to the required rate of return

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ABC Pharmaceuticals Inc. issued $50 million in bonds due in 15 years. After discussions with its investment banker, ABC decided that the bonds would be issued with a coupon rate of 10 percent with interest paid annually

Problem a) Explain why the coupon rate is equal to the required rate of return (yield to maturity) at the time of bond issuance. A few days after issuing the bonds, ABC announced that it was under investigation by the US government for falsifying results regarding the side-effects of a drug it previous developed.

Problem b) What would happen to the required rate of return on ABC's bonds? EXPLAIN

Problem c) Suppose investor now require a 16% return on the bonds. Determine the price of the bond.

Reference no: EM132678793

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