Question

Fibbo, Inc. issued one year ago annual coupon paying bonds that orignially had 13 years to maturity. These bonds have a face value of $1,000 and a current market value of $1,030. At this market value, the bonds have a yield-to-maturity of 4.14% What is the coupon rate for these bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The coupon rate is computed as shown below:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Face value / (1 + r)ⁿ

$ 1,030 = Coupon payment x [ [ 1 - 1 / (1 + 0.0414)¹² / 0.0414 ] + $ 1,000 / 1.0414¹²

$ 1,030 = Coupon payment x 9.309296196 + $ 614.5951375

($ 1,030 - $ 614.5951375) / 9.309296196 = Coupon payment

$ 44.62258518 = Coupon payment

So, the coupon rate will be computed as follows:

= Coupon payment / Face value

= $ 44.62258518 / $ 1,000

= 4.46% Approximately

Feel free to ask in case of any query relating to this question