Question

Kiss the Sky Enterprises has bonds on the market making annual payments, with 15 years to maturity, and selling for $890. At this price, the bonds yield 8.5 percent. What must the coupon rate be on the bonds? rev: 09_18_2012 Multiple Choice 14.35% 8.50% 8.06% 7.18% 7.28%

Answer 1

Current price=Annual coupon*Present value of annuity factor(8.5%,15)+$1000*Present value of discounting factor(8.5%,15)

890=Annual coupon*8.304236576+1000*0.294139891

Annual coupon=(890-294.139891)/8.304236576

Annual coupon=$71.75(Approx)

Coupon rate=Annual coupon/Face value

=$71.75/$1000

=7.18%(Approx).

NOTE:

1.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=Annual coupon[1-(1.085)^-15]/0.085

=Annual coupon*8.304236576

2.Present value of discounting factor=1000/1.085^15

=1000*0.294139891