Question

Outstanding bonds have a $1,000 par value and they mature in 20 years. Their nominal yield to maturity is 9.00 percent and they pay interest semiannually. The bonds sell at a price of $975.00.
What is the bond's coupon rate?

Answer 1

Answer:

coupon rate = 4.4% semiannual

annual rate = 8.8%

Explanation:

we can use the approximate yield to maturity formula to determine an approximate coupon rate:

YTM = {coupon + [(face value - market value)/n]} / [(face value + market value)/2]

4.5% = {coupon + [($1,000 - $975)/40]} / [($1,000 + $975)/2]

$987.50 x 4.5% = coupon + [($1,000 - $975)/40]

$44.4375 = coupon + $0.625

$43.8125 = coupon

coupon rate = $43.8125 / $1,000 = 0.0438 = 4.4% semiannual

annual rate = 8.8%