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nikita enterprises has bonds on the market making annual payments, with twelve years to maturity, a par value of $1,000, and selling for $984. at this price, the bonds yield 7.7 percent. what must the coupon rate be on the bonds?

Sagot :

The coupon rate of the bond is 7.49%

The amount of annual interest income provided to a bondholder based on the bond's face value is known as the coupon rate. Governmental and non-governmental organizations both issue bonds to raise funds for operating costs. When a person purchases a bond, the bond issuer makes a pledge to the bondholder to make monthly payments based on the bond's principal amount at the coupon rate specified in the issued certificate.

Using excel PMT function

Where

NPER = Year to maturity = 12 Years

PV = Price of bond = $984

FV = face value = $1000

Rate = bond's yield = $7.7

The formula for calculating the coupon rate is as follows:

P = (PV*R) / [1 - (1 + R)^(-n)]

We subsitute the values of in the excel function where:

=PMT(0.077, 12, -984, 1000, 0)

We get the annual coupon payment of $749

Dividing the coupon payment by 1000 and multiplying by 100 to get the coupon rate of 7.49%

Learn more about bonds:

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