Question

Mouse, Inc.’s outstanding bonds have a $1,000 par value, and they mature in 5 years. Their yield to maturity in 9%, based on semiannual payments, and the current market price is $853.61. What is the bond’s annual coupon rate?

Answer 1

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AS FOR GIVEN DATA..

Mouse, Inc.’s outstanding bonds have a $1,000 par value, and they mature in 5 years. Their yield to maturity in 9%, based on semiannual payments, and the current market price is $853.61. What is the bond’s annual coupon rate?

EXPLANATION ::-

Let's look at the facts: FV is 1,000, the semi-annual coupon is unknown,

the yield to maturity is 9% or 4.5% on a semi-annual basis and the PV is 853.61.

By the way, since the current price of the bond is way less than par that tells us the coupon rate is way less than 9%.

If you solve for the coupon amount,

then

the semi-annual coupon is $26.50 (rounded) or $53 (rounded).

Therefore,

the annual coupon rate is 5.3% ($53 / $1,000).

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