Question

Gabriele Enterprises has bonds on the market making annual payments, with 10 years to maturity, a par value of $1,000, and selling for $910. At this price, the bonds yield 12 percent. What must the coupon rate be on the bonds?

Answer 1

Information provided:

Par value = future value = $1,000

Present value (PV)= $910

Time (N)= 10 years

Interest rate (I/Y)= 12%

The question is solved by first calculating the amount of coupon payment.

                                                                                                                                                

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

FV= 1,000

PV= -910

N= 10

I/Y= 12

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

The value obtained is 104.07.

Therefore, the amount of coupon payment is $104.07.

Coupon rate = Coupon payment / Par value

= $104.07 / $1,000

= 0.1041*100

= 10.41%.