Question

Problem 7-5 Coupon Rates [LO2] Page Enterprises has bonds on the market making annual payments, with twelve years to maturity, and selling for $984. At this price, the bonds yield 7.70 percent. What must the coupon rate be on the bonds? (Round your answer to 2 decimal places. (e.g., 32.16)) Coupon rate

Answer 1

Here we need to find the coupon rate of the bond. All we need to do is to setup the bond pricing equation and solve for the coupon payment as follows:

P = $984 = C(PVIFA_7.70%,12) + $1,000(PVIF_7.70%,12)

Solving for the coupon payment, we get:

C = $74.91

The coupon payment is the coupon rate times par value. Using this relationship, we get:

Coupon rate = $74.91 / $1,000

Coupon rate = .0749, or 7.49%