Gabriele Enterprises has bonds on the market making annual payments, with 16 years to maturity, a...
Gabriele Enterprises has bonds on the market making annual payments, with 16 years to maturity, a par value of $1,000, and selling for $880. At this price, the bonds yield 11 percent. What must the coupon rate be on the bonds?
Homework Answers
Current price=Annual coupon*Present value of annuity factor(11%,16)+$1000*Present value of discounting factor(11%,16)
880=Annual coupon*7.37916178+$1000*0.188292204
Annual coupon=(880-188.292204)/7.37916178
=93.74(Approx).
Coupon rate=Annual coupon/Par value
=(93.74/1000)
=9.37%(Approx).
NOTE:
1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=Annual coupon[1-(1.11)^-16]/0.11
=Annual coupon*7.37916178
2.Present value of discounting factor=1000/1.11^16
=1000*0.188292204
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