Question

Ghost Rider Corporation has bonds on the market with 13 years to maturity, a YTM of 6.3 percent, and a current price of $930. What must the percentage coupon rate be on the company’s bonds? Note: Corporate bonds pay semi-annual coupons. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

The coupon rate is computed as shown below:

Bonds Price = Coupon payment x [ [ (1 - 1 / (1 + r)ⁿ ] / r ] + Par value / (1 + r)ⁿ

$ 930 = Coupon payment x [ [ (1 - 1 / (1 + 0.0315)²⁶ ] / 0.0315 ] + $ 1,000 / 1.0315²⁶ (Since the bonds are semi annual coupon bonds, hence r is divided by 2 and n is multiplied by 2)

$ 930 = Coupon payment x 17.57213038 + $ 446.477893

Coupon payment = ($ 930 - $ 446.477893) / 17.57213038

Coupon payment = $ 27.51641927

So, the coupon rate will be as follows:

= ($ 27.51641927 / $ 1,000) x 2

= 5.50% Approximately

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