Question

Cagle Distribution Company has bonds outstanding that make annual payments. These bonds have nine years to...

  1. Cagle Distribution Company has bonds outstanding that make annual payments. These bonds have nine years to maturity and are selling for $948.00. The yield to maturity of these bonds is 5.9 percent. Determine the coupon rate on the bonds.
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Answer #1

Current price=Annual coupon*Present value of annuity factor(5.9%,9)+1000*Present value of discounting factor(5.9%,9)

948=Annual coupon*6.83139315+1000*0.596947804

Annual coupon=(948-596.947804)/6.83139315

=$51.3880827

Coupon rate=Annual coupon/Face value

=51.3880827/1000

=5.14%(Approx).

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=Annual coupon[1-(1.059)^-9]/0.059

=Annual coupon*6.83139315

2.Present value of discounting factor=1000/1.059^9

=1000*0.596947804

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