Question

McConnell Corporation has bonds on the market with 22.5 years to maturity, a YTM of 6.9 percent, a par value of $1,000, and a current price of $1,057. The bonds make semiannual payments. What must the coupon rate be on these bonds

Answer 1

Answer:

7.40%

Explanation:

The coupon rate of the bond can be calculated as follows

Formula: $p= C * \frac{1 - \frac{1}{(1 + i)^{n}}}{i} + \frac{M}{(1 + i)^{n}}$

DATA

M = $1000

n = 22.5 *2 =45 semi-annual periods,

i = 6.9%/2 = 3.45% (semi-annually)

P = $1,057

Solution

1057 =$C * \frac{1 - \frac{1}{(1 + 0.0345)^{45}}}{0.0345} + \frac{1000}{(1 + 0.0345)^{45}}$

1057 = C * 22.69 + 217.33

839.67 + C * 22.69

C = $37.01        This is a semi-annual coupon

Annual Coupon = 2 * $37.01 = $74.02

Annual Coupon Rate = 7.40%