McConnell Corporation has bonds on the market with 20 years to maturity, a YTM of 6.8...
McConnell Corporation has bonds on the market with 20 years to
maturity, a YTM of 6.8 percent, a par value of $1,000, and a
current price of $1,326.50. The bonds make semiannual payments.
What must the coupon rate be on these bonds?
Homework Answers
Information provided:
Par value= Future value= $1,000
Present value= $1,326.50
Time= 20 years*2= 40 semi-annual periods
Yield to maturity= 6.80%/2= 3.40% per semi-annual period
The coupon rate is calculated by first computing the coupon payments.
The coupon payment is calculated by entering the below in a financial calculator:
FV= 1,000
PV= -1,326.50
N= 40
I/Y= 3.40
Press the CPT key and PMT to compute the amount of coupon payment.
The value obtained is $49.0528 per semi-annual period.
Therefore, the amount of annual coupon payment is $49.0528*2= $98.11.
Coupon rate is calculated using the below formula:
Coupon rate= Annual coupon payment/ Par value of bond*100
= $98.11/ $1,000*100
= 0.0981*1,000
= 9.81%.
The coupon rate of the bond is 9.81%.
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