O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their...

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O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their...

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate? 6.27% 6.60% 6.95% 7.32% 7.70%

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Answer 1

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Answer #1

Price of a bond is mathematically represented as: 1 1-- (1 + i) PEC. - +- м. (1 + i) where P is price of bond, with periodi

For this bond,

M = $1000, P = $850, i = 9.25%/2 = 4.625% (semi-annually), n = 25 * 2 = 50 semi-annual periods

850 = C* 1- (1+0,04625)50 0.04625 1000 (1 + 0.04625 50

850 = C * 19.3668 + 104.2861

C = $38.50

Hence Annual Coupon = 2 * $38.50 = $77

Coupon Rate = $77/$1000 = 7.70%

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Answer 2

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