Question

McConnell Corporation has bonds on the market with 17 years to maturity, a YTM of 11.0 percent, a par value of $1,000, and a current price of $1,156.50. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Answer 1

Information provided:

Par value = future value = $1,000

Present value= $1,156.50

Yield to maturity= 11%/2= 5.50% per semi-annual period

Time= 17 years*2= 34 semi-annual periods

The question is solved by first computing the amount of coupon payment.

The coupon payment is computed by entering the below in a financial calculator:

FV= 1,000

PV= -1,156.50

I/Y= 5.50

N= 34

Press the CPT key and PMT to compute the amount of coupon payment.

The value obtained is 65.2710.

Therefore, the amount of coupon payment is $65.27.

Coupon rate = Coupon payment / Par value*100

= $65.27 / $1,000*100

= 0.0653100

= 6.53%.