Question

Shannon purchases a bond for $1,142.38. The bond matures in 3 years, and she will redeem it at its face value of $1,200. Interest premiums are paid annually. If Shannon will earn a yield of 15.5%/year compounded yearly, what is the bond interest rate?

Answer is not 3.5% or 63%

Answer 1

Par/Face value = 1200
Let the coupon rate be x
Annual Coupon = 1200*(x)
Present Value = Future value/ ((1+r)^t)
where r is the yield to maturity that is 15.5% and t is the time period in years.
Price of the bond = sum of present values of future cash flows
Price of bond = 1142.38
Use excel to find x.
x	0.1335
t	1	2	3
future cash flow	160.2	160.2	1360.2
present value	138.7013	120.0877	882.7888
price/sum of present values	1142
x (coupon rate) = .1335
The bond interest rate is 13.35%.