Question

Coupon Rates [LO2] Kuala Enterprises has bonds on the market making annual payments, with 10 years to maturity, and selling for $1,045. At this price, the bonds yield 7.5 percent. What must the coupon rate be on the bonds? 5.

Answer 1

Suppose the face value of the bond be $1000
Present value=$1045
Yield to maturity=7.5%
Time period=10 years
First we need to determine the coupon payment using excel.

a 1 Face value 1000 2 Present value -1045 3 Yield to maturity 7.50% 4 Time period 5 Payments $81.56 6 Formula used: PMT(R3, R4, R2,R1)

As the present value is a cash outflow, we have taken it as negative.

Annual coupon payment=81.56
(Coupon rate)*(Face value)=Annual coupon payment=81.56
(Coupon rate)*(1000)=81.56
(Coupon rate)=81.56/1000=0.08156 or 8.16% (Rounded to two decimal places)