Question

Big Canyon Enterprises has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a price of $958. At this price, the bonds yield 8.9 percent. What must the coupon rate be on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Coupon rate

Answer 1

Price of the Bond is Present value of Future cashinflows disocunted at YTM or Interest rate. Future cashinflows will be Coupon Payments as well as Maturity value Coupon Payment is = Face value * Coupon Rate Maturity value is 5 1,000/- Number of years to maturity is = 10 Price is = 5 958/. Yield rate is = 8.90% Using trial and error method we can find coupon rate as below:- Computation of Present value of Future Cashinflows - Cash Present Year PVF @7.30% Flows $ . Value $ 83.65 0.92 76.81 83.65 0.84 70.54 83.65 0.77 64.77 83.65 0.71 59.48 83.65 0.65 54.62 83.65 0.60 50.15 83.65 0.55 46.05 83.65 0.51 42.29 83.65 0.46 38.83 83.65 0.43 35.66 83.65 0.39 32.75 83.65 0.36 30.07 83.65 0.33 27.61 83.65 0.30 25.36 1,000.00 0.30 303.12 Present Value 958.11 Coupon rate is - (Coupon Payment/Face value)*100 Coupon rate is = (83.65/1000)*100 Coupon rate is = 8.365%