Question

5 years ago you purchased a 15 year $1,000 bond. The bond sells for $899.06. Comparable...

5 years ago you purchased a 15 year $1,000 bond. The bond sells for $899.06. Comparable debt yields 11 percent. What is the bond's coupon rate?

10.85%

7.71%

8.66%

9.29%

9.81%

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Answer #1

Answer is 9.29%.

Year Present value factor @ 11%
1 0.9009
2 0.8116
3 0.7312
4 0.6587
5 0.5935
6 0.5346
7 0.4817
8 0.4339
9 0.3909
10 0.3522
Total 5.8892

Bond valuation is calculating the present value of a bond's future interest payments and the bond's value upon maturity.

Let X be the coupon.

899.08 = (X*5.8892) + (1000*0.3522)

899.08 - 352.20 = 5.8892X

546.86 / 5.8892 = X

X = 92.85811

Coupon is $ 92.86

Coupon rate is (92.86/ 1000) * 100

= 9.29%

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