Question

McConnell Corporation has bonds on the market with 10.5 years to maturity, a YTM of 7.1 percent, a par value of $1,000, and a current price of $1,051. The bonds make semiannual payments.

Answer 1

Annual Coupon rate of the Bond

The Coupon rate of the Bond is calculated using financial calculator as follows (Normally, the rate is calculated either using EXCEL Functions or by using Financial Calculator)

Variables	Financial Calculator Keys	Figure
Face Value [$1,000]	FV	1,000
Coupon Amount	PMT	?
Yield to Maturity [7.10% x ½]	1/Y	3.55
Time to Maturity [10.50 Years x 2]	N	21
Bond Price [-$1,051]	PV	-1,051

We need to set the above figures into the financial calculator to find out the semi-annual coupon amount. After entering the above keys in the financial calculator, we get the semi-annual coupon amount (PMT) = $39.00

Here, we get semi-annual Coupon amount = $39.00

Annual Coupon Amount = $78.00 [$39.00 x 2]

The coupon rate is calculated by dividing the annual coupon amount with the par value of the Bond

So, Annual Coupon Rate = [Annual Coupon Amount / Par Value] x 100

= [$78.00 / $1,000] x 100

= 7.80%

“Therefore, the Coupon Rate of the Bond will be 7.80%”