Lei Corporation has bonds on the market with 16.5 years to maturity, a YTM of 7.7 percent, a par value of $1,000, and a current price of $1,065. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Question

07-02-2021
Business

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Lei Corporation has bonds on the market with 16.5 years to maturity, a YTM of 7.7 percent, a par value of $1,000, and a current price of $1,065. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Sagot :

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topeadeniran2 topeadeniran2 · Answer 1 · 2021-02-12T05:05:46-05:00

Answer: 8.40%

Explanation:

Based on the information given, to solve the coupon rate goes thus using a financial calculator. This will be:

Par value = $1000

NPER = 16.5 × 2 = 33

Present value = $1065

Yield to maturity = 7.7%/2 = 3.85%

Coupon payment = $42.01

Coupon rate = Coupon payment / 1000

= 42.01 / 1000

= 0.04201

Annual coupon rate = Coupon rate × 2 = 4.20 × 2 = 8.40%

Therefore, the coupon rate on the bond will be 8.40%

Note that the NPER is the period for the investment. In this case, the NPER is 33 because it makes semiannual payment which means that we will multiply the years given by 2.

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