Question

Kiss the Sky Enterprises has bonds on the market making annual payments, with 17 years to...

Kiss the Sky Enterprises has bonds on the market making annual payments, with 17 years to maturity, and selling for $820. At this price, the bonds yield 9.8 percent. What must the coupon rate be on the bonds?

Multiple Choice

  • 7.68%

  • 9.25%

  • 9.80%

  • 15.17%

  • 7.58%

Homework Answers

Answer #1

Current price=Annual coupon*Present value of annuity factor(9.8%,17)+1000*Present value of discounting factor(9.8%,17)

820=Annual coupon*8.12182554+1000*0.204061097

Annual coupon=(820-204.061097)/8.12182554

=$75.8374949(Approx)

Coupon rate=Annual coupon/Face value

=75.8374949/1000

=7.58%(Approx)

NOTE:

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

=Annual coupon[1-(1.098)^-17]/0.098

=Annual coupon*8.12182554

2.Present value of discounting factor=1000/1.098^17

=1000*0.204061097

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