Question

McConnell Corporation has bonds on the market with 10 years to maturity, a YTM of 9.6 percent, a par value of $1,000, and a current price of $1,276.50. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Answer 1

We know that ,

Price of bond = Coupon/(1+ytm/2)^1+Coupon/(1+ytm/2)^2 + ....................(FV +Coupon)/(1+ytm/2)^{2*N}

where N is maturity

1,276.50 = Coupon/(1+0.096/2)^1 +Coupon/(1+0.096/2)^2 +.........................(1000+ Coupon) /(1+0.096/2)^20

On solving Above equation ,

Coupon = 69.8124

Coupon Rate = {Coupon / FV }*100 = {69.8124/1000 }*100 = 6.98% Answer

6.98% is semi annual coupon rate.

Annual coupon rate = 6.98*2 = 13.96% Answer

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