Question

A company releases a​ five-year bond with a face value of​ $1,000 and coupons paid semiannually. If market interest rates imply a YTM of

10​%,

what should be the coupon rate offered if the bond is to trade at​ par?

Answer 1

Information provided:

Face value= future value= $1,000

Present value= -$1,000

Time= 5 years*2= 10 semi-annual periods

Yield to maturity= 10%/2= 5%

The question is solved by calculating the coupon payment.

Enter the below information in a financial calculator to compute the coupon payment:

FV= 1,000

PV= -1,000

N=10

I/Y= 5

Press CPT and PMT to calculate the coupon payment,

The value obtained is $50.

Therefore, the semi-annual coupon rate= $50/$1,000= 5% and the annual coupon rate is 5%*2= 10%.