Question

A $1,000 face value bond is currently quoted at 101.2. the bond pays semiannual payments of $28.50 each and matures in six years. what is the coupon rate?

Answer 1

Coupon rate is the yearly interest earned by a loan and it can be calculated with


`C = (i)/(p)`

where i is the annual interest and p is the par value of the bond or the initial loan amount.

For this particular case, since the semiannual payment is $28.50, then the annual payment is 2 x 28.50 = $57.00.

Thus, we have


`C = (57)/(1000) = 0.057`

From this, the coupon rate is 0.057 x 100% = 5.7%.
Answer: 5.7%