Question

DMA Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $ 1,000, and a current price of $965. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Answer 1

Bonds are financial instruments that provide fixed returns to its holders. Bonds actually have a nature of debt with a fixed interest rate and a maturity, also known as Plain Vanilla Bond. Some bonds have a callability feature which enables the issuer to call and buy back the bonds from the bondholders.

The formula for calculating the price of the Bond is as:

Where C denotes the Coupon Amount

r denotes the Yield to Maturity, 5.3% annually or 0.0265 compounded semi-annually

n denotes the Number of Periods to maturity or 14.5*2 = 29

Substituting the available values, calculate C:

The semi-annual coupon amount is $ 24.751

The semi-annual coupon rate is ($ 24.751/$ 1000 * 100) = 2.475%

Thus, the annual coupon rate is (2.475% * 2) = 4.95%