Question

# 8. A bond with 20 years to maturity is selling for \$1,250 and has a yield...

8. A bond with 20 years to maturity is selling for \$1,250 and has a yield to maturity of 13.5 percent. If this bond pays its coupon payments semi-annually and its par value is \$1,000, what is the bond’s annual coupon rate?

A. 18.13 percent

B.17.14 percent

C. 17.42 percent

D. 8.57 percent

You need to use a Financial calculator to solve this problem. You can download it.

N = 20 * 2 = 40 (The Bond is for 20 Years, semiannual, so 40 payments)

PV = -1250 (The present value of the bond is \$1250)

FV = 1,000 (The Face value of bond is \$1,000)

I/Y = 13.5/2 = 6.75 (The YTM is for 1 year, so semiannual will be divided by 2)

CPT + PMT = 85.71

So 85.71 is the semiannual payment, so annual will be 85.71*2 = 171.42

So the coupon rate is (Coupon / Face Value) * 100

= (171.42 / 1000) * 100

= 17.14%

The correct option is "B"

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