In: Finance
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?
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