Question

McConnell Corporation has bonds on the market with 11 years to maturity, a YTM of 6.4 percent, a par value of $1,000, and a current price of $1,156.50. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Answer 1

Face value of the bond = $1000

YTM = 6.4%

Time to maturity in years = 11 years

Current price of the bond = 1156.50

The bond pays coupons semiannually.

No. of semiannual periods = 11*2 = 22

Semi-annual YTM = 6.4%/2 = 3.2%

Method: Semiannual payment calculation using ba ii plus calculator

Input the following values in ba ii plus calculator

N = 22

I/Y = 3.2

PV = -1156.50

FV = 1000

CPT -> PMT [Press CPT and then press PMT]

We get PMT = 42.0177683448005

Note that this is the semiannual coupon payments as we have considered semi-annual periods and semi-annual YTM

Annual coupon payment = Semi-annual coupon payment*2 = 42.0177683448005*2 = 84.0355366896011

Annual coupon rate = Annual coupon payment/Face value = 84.0355366896011/1000 = 8.40355366896011% ~ 8.40% (Rounded to two decimals)

Coupon rate = 8.40 %

Answer (%) -> 8.40