Suppose a five-year, $1,000 bond with annual coupons has a price of $895.54 and a yield to maturity of 6.1%.What is the bond's coupon rate?
The bond's coupon rate is ____%. (Round to three decimal places.)
Current price=Annual coupon*Present value of annuity factor(6.1%,5)+$1000*Present value of discounting factor(6.1%,5)
895.54=Annual coupon*4.200929113+$1000*0.743743324
Annual coupon=(895.54-743.743324)/4.200929113
=$36.134(Approx).
Coupon rate=Annual coupon/Face value
=$36.134/$1000
=3.613%(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=Annual coupon[1-(1.061)^-5]/0.061
=Annual coupon*4.200929113
2.Present value of discounting factor=1000/1.061^5
=1000*0.743743324
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