In: Accounting
AB Builders, Inc., has 24-year bonds outstanding with a par value of $2,000 and a quoted price of 97.842. The bonds pay interest semiannually and have a yield to maturity of 6.80 percent. What is the coupon rate?
Solution
Given in question,
Par Value = $2000
Issue Price = 97.842
Yield to maturity = 6.80%
Interest = semi annually
Now,
Coupon rate = Annual Coupon Payment / Bond Par value * 100
so, we first need to calculate the semi-annual coupon payment on the bond using the pmt formula in excel
= pmt(rate,nper,-pv,fv)
here in formula,
Rate = 6.80% / 2 = 3.40% (six month yield to maturity as coupon pays semi annually)
nper = 24 * 2 = 48 (the number of periods to maturity) (years multiplied by 2)
pv = 97.842%*2000=$1956.84 (current price of the bond)
fv = $2000 (Future value of Bond)
= pmt(3.40,48,-1956.84,2000)
pmt=66.164
That means semi annually coupon payment = $66.164
and annual coupon payment would be = 66.164 * 2=$132.33 annually
Coupon rate = Annual Coupon Payment / Bond Par value * 100
=132.33 / 2000
=6.62%
Therefore, correct answer is Option C.