Question

ABC Enterprises has bonds on the market making annual payments, with 20 years to maturity, and selling for $850. At this price, the yield to maturity is 3.5%. What must the coupon rate % ? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) (Omit % sign in your response.)

Answer 1

Given,

Rate = 3.5% or 0.035

Nper = 20 years

PV = –$850 (for calculation purposes "–" (minus) is required)

FV = $1,000 (assumed)

Type = 0 (assuming interest paid at the end of the month). If interest paid at the beginning of the month then Type = 1.

∴ This question can be solved using the PMT Function in Excel; where:

PMT (Rate,Nper,-PV,FV,Type) = Coupon Value

=PMT (0.035,20,-850,1,000,0) = $24.45                                

∴ Coupon Rate = (Coupon Value ÷ Face Value) × 100

                      = $24.45 ÷ 1,000

                      = 0.02445

                      = 2.44 (taking upto 2 decimal places & omitting % sign)

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