Question

A 6-year Circular File bond with a face value of $1,000 pays interest once a year of $80 and sells for $986. a.What are its coupon rate and yield to maturity? (Do not round intermediate calculations. Enter the coupon rate as a percent rounded to 1 decimal place and the yield to maturity as a percent rounded to 2 decimal places.) Coupon rate % Yield to maturity % b.If Circular wants to issue a new 6-year bond at face value, what coupon rate must the bond offer? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Coupon rate %

Answer 1

The coupon rate of the bond is 8% and the yield to maturity is 12.64%. For a new 6-year bond at face value, the coupon rate must be 12.64%.

Step-by-step explanation:

To find the coupon rate, we can divide the annual interest payment by the bond's face value. In this case, the annual interest payment is $80 and the face value is $1,000. Therefore, the coupon rate is ($80/$1000) * 100% = 8%. To find the yield to maturity, we need to use the bond's current price, face value, and time to maturity in a yield to maturity formula. In this case, the current price is $986, the face value is $1,000, and the time to maturity is 6 years. Using a financial calculator or spreadsheet, we find that the yield to maturity is approximately 12.64%, rounded to 2 decimal places.

If Circular wants to issue a new 6-year bond at face value, the coupon rate must be equal to the yield to maturity calculated in the previous step. So, the coupon rate for the new bond should be 12.64%.