Exxon has existing bonds on the market making annual payments they have a maturity horizon of 9 years the current selling price of exxon is $948 at this price the bond yield 5.90% what must the coupon rate be on the exxon bonds?
Par Value = $1,000
Current Price = $948
Annual YTM = 5.90%
Time to Maturity = 9 years
Let annual coupon be $C
$948 = $C * PVIFA(5.90%, 9) + $1,000 * PVIF(5.90%, 9)
$948 = $C * (1 - (1/1.0590)^9) / 0.0590 + $1,000 / 1.0590^9
$948 = $C * 6.83139 + $596.9478
$C * 6.83139 = $351.0522
$C = $51.39
Annual Coupon = $51.39
Annual Coupon Rate = $51.39 / $1,000
Annual Coupon Rate = 0.05139
Annual Coupon Rate = 5.139% or 5.14%
So, coupon rate on the Exxon bonds is 5.14%
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