Question

1.A bond currently trades at $1,045.00 and has a face value of $1,000. If the annual yield is 6% and the bond has 19 years to maturity, what is its coupon rate?

2. A bond maturing in 7 years at a par value of $1,000 has a coupon rate of 6% and current yield of 7%. What is the price of the bond?

Answer 1

1. Information provided:

Face value= future value= $1,000

Time= 19 years

Annual yield= 6%

Current price= present value= $1,045

The amount of coupon payment is first calculated

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

FV= 1,000

PV= -1,045

N= 19

I/Y= 6

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

The value obtained is 64.0329.

The coupon rate is computed using the below formula:

Coupon rate= Annual coupon payment/ Face value

   = $64.0329/ $1,000

= 0.0640*100

= 6.40%.

2.Information provided:

Par value= future value= $1,000

Time= 7 years

Coupon rate= 6%

Coupon payment= 0.06*1,000= $60

Current yield= 7%

Current yield is calculated using the below formula:

Current Yield= Annual interest/Current price

0.07= $60/ Current price

Current price= $60/ 0.07

= $857.1429.

Therefore, the price of the bond is $857.14.

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