Question

Henley Corporation has bonds on the market with 10.5 years to maturity, a YTM of 5.7 percent, a par value of $1,000, and a current price of $945. The bonds make semiannual payments. 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

Solution to the First Question

Annual coupon rate on the Bond

The Coupon rate of the Bond is calculated using financial calculator as follows (Normally, the rate is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount	PMT	?
Market Interest Rate or Yield to maturity on the Bond [5.70% x ½]	1/Y	2.85
Maturity Period/Time to Maturity [10.50 Years x 2]	N	21
Bond Price [-$945]	PV	-945

We need to set the above figures into the financial calculator to find out the semi-annual coupon amount. After entering the above keys in the financial calculator, we get the semi-annual coupon amount (PMT) = $24.98.

The coupon rate is calculated by dividing the annual coupon amount with the par value of the Bond

So, Annual Coupon Rate = [Annual Coupon Amount / Par Value] x 100

= [($24.98 x 2) / $1,000] x 100

= [$49.96 / $1,000] x 100

= 5.00%

“Hence, the annual coupon rate on the Bond will be 5.00%”