Question

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?

Answer 1

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%.

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