FIN300 Ltd.'s outstanding bvonds have a $1,000 par value, and they mature in 20 years. Their...

FIN300 Ltd.'s outstanding bvonds have a $1,000 par value, and they mature in 20 years. Their nominal yield to maturity is 9.00%, they pay interest semiannually, and they sell at a price of $985. What is the bond's nominal coupon interest rate?

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Expert Solution

Information provided:

Face value= future value= $1,000

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

Yield to maturity= 9%/2= 4.50%

Current price= present value= $985

The bond’s coupon rate is calculated by computing the amount of coupon payment.

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

FV= 1,000

PV= -985

N= 40

I/Y= 4.50

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

The value obtained is 44.1849.

Therefore, the amount of annual coupon payment is $44.1849*2= $88.3697

Coupon rate is computed using the below formula:

Coupon rate= Annual coupon payment/ Par value of bond

= $88.3697/ $1,000

= 0.0884*100

= 8.84%.

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

jeff jeffy answered 6 months ago

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