Kiss the Sky Enterprises has bonds on the market making annual payments, with 9 years to...

Kiss the Sky Enterprises has bonds on the market making annual payments, with 9 years to maturity, and selling for $940. At this price, the bonds yield 7.4 percent. What must the coupon rate be on the bonds?

Expert Solution

Current price=Annual coupon*Present value of annuity factor(7.4%,9)+1000*Present value of discounting factor(7.4%,9)

940=Annual coupon*6.40580273+1000*0.525970598

Annual coupon=(940-525.970598)/6.40580273

=$64.6334924

Coupon rate=Annual coupon/Face value

=64.6334924/1000

=6.463%(Approx)

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=Annual coupon[1-(1.074)^-9]/0.074

=Annual coupon*6.40580273

2.Present value of discounting factor=1000/1.074^9

=1000*0.525970598

jeff jeffy answered 2 years ago

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