Question

McConnell Corporation has bonds on the market with 17 years to maturity, a YTM of 10.0 percent, a par value of $1,000, and a current price of $1,196.50. The bonds make semiannual payments. What must the coupon rate be on these bonds? Multiple Choice 20.81% 10.39% 24.90% 12.53% 12.43%

Answer 1

Information provided:

Par value= future value= $1,000

Current price= present value= $1,196.50

Time= 17 years*2= 34 semi-annual periods

Yield to maturity= 10%/2= 5% per semi-annual period

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

FV= 1,000

PV= -1,196.50

N= 34

I/Y= 5

Press the CPT key and PMT to calculate the semi-annual coupon payment.

The value obtained is 62.1349.

The amount of annual coupon payment= $62.1349*2= $124.2699 $124.27

Coupon rate= Annual coupon payment/ Par value

                    = $124.27/ $1,000

                    = 0.1243*100

                    = 12.43%.

Hence, the answer is option e.

In case of any query, kindly comment on the solution.