Question

Gabriele Enterprises has bonds on the market making annual payments, with 15 years to maturity, a par value of $1,000, and selling for $840. At this price, the bonds yield 8.1 percent. What must the coupon rate be on the bonds? Multiple Choice • 6.32% • 8.10% • 12.44% • 7.40% • 6.22%

Answer 1

Information provided:

Par value = Future value (PV)= $1,000

Present value (PV) = $840

Time (N)= 15 years

Interest rate (I/Y)= 8.1%

The question is solved by first calculating the coupon payment.

Enter the below in a financial calculator to compute the coupon payment:

FV= 1,000

PV = 840

N= 15

I/Y= 8.1

Press the CPT key and PMT to compute the coupon payment.

The value obtained is 62.19.

Thereby, the amount of coupon payment is $62.19.

Coupon rate = Coupon payment / Par value

= $62.19 / $1,000

= 0.622*100

= 6.22%.

Hence, the answer is option e.