ABC Enterprises has bonds on the market making annual payments, with 20 years to maturity, and...

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.)

Expert Solution

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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ekkarill92 answered 2 years ago

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