In: Finance
McConnell Corporation has bonds on the market with 23.5 years to maturity, a YTM of 7 percent, a par value of $1,000, and a current price of $1,051. The bonds make semiannual payments. |
What must the coupon rate be on these bonds? |
Information provided:
Par value= future value= $1,000
Time= 23.5 years*2= 47 semi-annual periods
Yield to maturity= 7%/2= 3.50% per semi-annual period
Current price= present value= $1,051
The coupon rate is computed by first calculating the coupon payment of the bond.
Enter the below in a financial calculator to compute the coupon payment:
FV= 1,000
PV= 1,051
N= 47
I/Y= 3.50
Press the CPT key and PMT to calculate the semi-annual coupon payment.
The value obtained is 37.2271.
The annual coupon payment is $37.2271*2= $74.45
Coupon rate= Annual coupon payment/ Par value
= $74.45/ $1,000
= 0.0745*100
= 7.45%.
Therefore, the coupon rate of the bond is 7.45%.
In case of any query, kindly comment on the solution.