bond has a current price of 96044 a maturity value of 1000 a

bond has a current price of $960.44, a maturity value of $1,000, and matures in five years. If interest is paid semi-annually and the bond\'s yield to maturity is 9%, what is the bond\'s annual coupon rate? Please show how you achieved answer

Solution

Hi,

Please find the detailed answer as follows:

Step 1: Calculate the Amount of Interest Payment

PV = 960.44 (indicates the current bond price)

Nper (n) = 5*2 = 10 (indicates the period)

FV = 1000 (indicates the face value of bonds)

Rate (I) = 9%/2 = 4.5% (indicates semi-annual YTM)

PMT = ? (indicates the amount of interest payment)

Interest Payment = PMT(Rate,Nper,PV,FV)*2 = PMT(4.5%,10,-960.44,1000)*2 = $80

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Step 2: Calculate Coupon Rate:

Coupon Rate = Annual Interest Payment/Face Value*100 = 80/1000*100 = 8%

Answer is 8%.

Thanks.