Question

Determine the coupon rate on a 3-year maturity bond, priced at $ 1,106.92 and a yield to maturity (YTM) of 6%?

Answer 1

The coupon rate is computed as shown below:

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

$ 1,106.92 = Coupon payment x [ [ (1 - 1 / (1 + 0.06)³ ] / 0.06 ] + $ 1,000 / 1.06³

$ 1,106.92 = Coupon payment x 2.673011949 + $ 839.619283

$ 1,106.92 - $ 839.619283 = Coupon payment x 2.673011949

$ 267.300717 / 2.673011949 = Coupon payment

$ 100 Approximately = Coupon payment

So, the coupon rate will be as follows:

= Coupon payment / Face value

= $ 100 / $ 1,000

= 10%

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