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What is the coupon rate of a 4-year, $1000 bond with coupons paid annually and a...

What is the coupon rate of a 4-year, $1000 bond with coupons paid annually and a price of $850, if it has a yield to maturity of 12%? Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write enter 0.05 as an answer."

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Expert Solution

Statement showing computation of coupon interest:
(Let coupon rate be 'x%', so coupon payment= 1000*0.0x= 10x)
Particulars Time PVf @12% Amount PV
Cash Flows (Interest)                          1.00                   0.8929 10x 8.929x
Cash Flows (Interest)                          2.00                   0.7972 10x 7.972x
Cash Flows (Interest)                          3.00                   0.7118 10x 7.118x
Cash Flows (Interest)                          4.00                   0.6355 10x 6.355x
Cash flows (Maturity Amount)                          4.00                   0.6355    1,000.00                        635.50
Fair Price 30.373x + 635.50
Fair price= 850
So 30.373x+635.50=850
30.373x=214.50
x=7.06
So coupon rate is 0.0706

jeff jeffy answered 1 year ago
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