Question

Suppose a five-year, $1,000 bond with annual coupons has a price of $898.63 and a yield to maturity of 6.3%. What is the bond's coupon rate? The bond's coupon rate is 11%. (Round to three decimal places.)

Answer 1

Information provided:

Par value= future value= $1,000

Current price= present value= $898.63

Time= 5 years

Yield to maturity= 6.3%

The question is solved by first calculating the coupon payment.

Enter the below in a financial calculator to compute the amount of coupon payment:

FV= 1,000

PV= -898.63

N= 5

I/Y= 6.3

Press the CPT key and PMT to compute the coupon payment.

The value obtained is 38.7384.

Therefore, the coupon payment is $38.7384.

Coupon rate= Coupon payment/ Par value*100

                        = $38.7384/ $1,000 *100

                        = 0.0387*100

                        = 3.8738%   3.874%.

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