Question

Beam Inc. bonds are trading today for a price of ​$1,185.41. The bond currently has 13 years until maturity and has a yield to maturity of 7.25​%.

The bond pays annual coupons and the next coupon is due in one year. What is the coupon rate of the​ bond? (round to one decimal place.)

Answer 1

Solution

Current price of bond=Present value of coupon payments+Present value of face value

Current price of bond=Coupon payment*((1-(1/(1+r)^n))/r)+Face value/(1+r)^n

where

Current price of bond=1185.41

n=number of periods=13

r-discount rate per period=ytm=7.25%

Coupon payment=Coupon rate*Face value

1185.41=Annual Coupon payment*((1-(1/(1+.0725)^13))/.0725)+1000/(1+.0725)^13

Solving we get Annual Coupon payment=94.99986

Thus coupon rate=94.99986/1000=.09499986

Thus Coupon rate =9.5%

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answered by: anonymous