O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their...

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 8.75%, they pay interest semiannually, and they sell at a price of $875. What is the bond's nominal (annual) coupon interest rate? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

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Expert Solution

Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Yield to maturity= 8.75%/2= 4.3750% per semi-annual period

Current price= present value= $875

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

N= 40

I/Y= 4.3750

PV= -875

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

The value obtained is 37.0779.

The annual coupon payment is $37.0779*2= $74.1557.

Annual coupon rate= Annual coupon payment/ Par value

= $74.1557/ $1,000

= 0.0742*100

= 7.4156.

Therefore, the annual coupon rate is 7.4156.

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

jeff jeffy answered 9 months ago

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