Question

You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2016. The bonds have a par value of $1,000.

Rate	Maturity Mo/Yr	Bid	Asked	Chg	Ask Yld
??	May 26	103.5488	103.6370	+.3041	2.369
5.324	May 31	104.4978	104.6435	+.4317	??
6.173	May 41	??	??	+.5431	4.071

In the above table, find the Treasury bond that matures in May 2026. What is the coupon rate for this bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Coupon rate      

Answer 1

Annual coupon rate for the Bond

The Coupon rate of the Bond is calculated using financial calculator as follows (Normally, the rate is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [-$1,000]	FV	-1,000
Coupon Amount	PMT	?
Market Interest Rate or Required Rate of Return [3.369% x ½]	1/Y	1.1845
Time to Maturity [(May 2016 – May 2026) x 2]	N	20
Bond Price [-$1,000 x 103.6370%]	PV	-1,036.37

We need to set the above figures into the financial calculator to find out the semi-annual coupon amount. After entering the above keys in the financial calculator, we get the semi-annual coupon amount (PMT) = $13.90.

Here, we get semi-annual Coupon amount = $13.90.

Annual Coupon Amount = $27.80 [$13.90 x 2]

The coupon rate is calculated by dividing the annual coupon amount with the par value of the Bond

So, Annual Coupon Rate = [Annual Coupon Amount / Par Value] x 100

= [$27.80 / $1,000] x 100

= 2.78%

“Therefore, the coupon rate of the bond will be 2.78%”