Question

You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2016. The bonds have a par value of $1,000. Rate Maturity Mo/Yr Bid Asked Chg Ask Yld ?? May 19 103.5371 103.6249 +.3209 2.189 5.901 May 24 104.4861 104.6318 +.4209 ?? 6.128 May 34 ?? ?? +.5314 3.891 In the above table, find the Treasury bond that matures in May 2019. What is the coupon rate for this bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Coupon rate %

Answer 1

Annual coupon rate for the Bond

The Coupon rate of the Bond is calculated using financial calculator as follows (Normally, the rate is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount	PMT	?
Market Interest Rate or Yield to maturity on the Bond [2.189% X ½]	1/Y	1.0945
Time to Maturity [(May 2016 – May 2019) x 2]	N	6
Bond Price/Current Market Price of the Bond [-$1,000 x 103.6249%]	PV	-1,036.249

We need to set the above figures into the financial calculator to find out the semi-annual coupon amount. After entering the above keys in the financial calculator, we get the semi-annual coupon amount (PMT) = $17.22.

Here, we get semi-annual Coupon amount = $17.22

Annual Coupon Amount = $34.44 [$17.22 x 2]

The coupon rate is calculated by dividing the annual coupon amount with the par value of the Bond

So, Annual Coupon Rate = [Annual Coupon Amount / Par Value] x 100

= [$34.44 / $1,000] x 100

= 3.44%

“Hence, the coupon rate of the bond will be 3.44%”