Question

Ghost Rider Corporation has bonds on the market with 17 years to maturity, a YTM of 6.2 percent, and a current price of $948. What must the percentage coupon rate be on the company’s bonds? Note: Corporate bonds pay semi-annual coupons.

(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Information provided:

Face value= future value= $1,000

Time= 17 years*2= 34 semi-annual periods

Yield to maturity= 6.2/2= 3.1% per semi-annual period

Current price= present value= $948

The coupon rate is calculated by first computing the amount of coupon payment.

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

FV= 1,000

PV= -948

N= 34

I/Y= 3.1

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

The value obtained is 28.5040.

Coupon rate is computed using the below formula:

Coupon rate= Annual coupon payment/ Par value *100

                       = $28.5040*2/ $1,000*100

                        = $57.0080/ $1,000*100

                        = 0.057*100

                        = 5.70%.

In case of any query, kindly comment on the solution