Question

McConnell Corporation. has bonds on the market with 15 years maturity, a YTM of 6.6 percent, a par value of $1,000, and a current price of $1,306.50. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Answer 1

Given that;
Face value is $1,000
Present value is $1,306.50
Time period is 15 years.
As the bonds make semiannual payments, the number of periods is 15*2=30
YTM is 6.6%. As the bonds make semiannual payments, the semiannual ytm is 6.6%/2=0.033

To determine the coupon rate, we first need to determine the payment amount.
We can determine the payment amount using excel as:

As the present value is a cash outflow, we have taken it as negative in excel.

Now, the semiannual payment is $49.25
So, the annual payment=$49.25*2=98.5
Coupon rate=(Annual coupon payment)/(Face value)
=98.5/1000
=0.0985 or 9.85%

Answer: Hence, the annual coupon rate is 9.85%