Question

The HET Corp. has just issued semi-annual coupon bonds with a maturity of seven years and fair value of $1,000 each. The price received by the corporation is $1,151.33 per bond, which represents a yield to maturity of 8%. What is the coupon rate on these bonds?

Answer 1

Answer : Calculation of Coupon Rate on Bonds :

We know that :

Current Bond Price = ( Coupon * PVAF @ YTM for n years) + (Par Value * PVF @YTM for nth year)

YTM % is 8% / 2 = 4% ( As the coupons are paid semiannually so divided by 2)

n is the number of years to maturity = 7 * 2 = 14 ( As the coupons are paid semiannually so multiplied by 2)

1151.33 = (Coupon * PVAF @ 4% for 14 years) + (1000 * PVF @ 4% for 14th year)

1151.33 = (Coupon * 10.5631229289) + (1000 * 0.57747508275)

1151.33 - 577.47508275 = Coupon * 10.5631229289

==> Coupon = 573.85491725 / 10.5631229289

= 54.3262557022

Coupon % = 54.3262557022 / 1000

= 0.0543262557 or 5.43262557 (Semiannual)

= 5.43262557 * 2 = 10.865% or 10.87%(Annual)