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In: Finance

The current price of a 10-year, $1,000 par value bond is $1,000. Interest on this bond...

The current price of a 10-year, $1,000 par value bond is $1,000. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond? a. 10% b. 12% c. 14% d. 17% e. 21%

Solutions

Expert Solution

Par value= future value= $1,000

Present value= $1,000

Yield to maturity= 14%/2= 7%

Time= 10 years*2= 20 semi-annual periods

The question is solved by first computing the amount of coupon payment.

The below has to be entered in a financial calculator to compute the amount of coupon payment:

FV= 1,000

PV= -1,000

I/Y= 7

N= 20

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

The value obtained is 70.

Therefore, the amount of annual coupon payment is $70*2= $140.

Coupon rate is computed using the below formula:

Coupon rate= Annual coupon rate/ Par value

                       = $140/ $1,000

                       = 0.14*100= 14%.

Therefore, the annual coupon rate is 14%.

Hence, the answer is option c.

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

jeff jeffy answered 9 months ago
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