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Carrie's Clothes, Inc. has a six-year bond outstanding that pays $60 annually. The face value of each bond is $1,000, and the bond sells for $900.

What is the bond's coupon rate? Round your answer to two decimal places.%

1 Answer

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Final Answer:

The bond's coupon rate is 6.67%.

Step-by-step explanation:

The coupon rate is calculated by dividing the annual coupon payment by the face value of the bond. In this case, the bond pays $60 annually, and the face value is $1,000. Therefore, the coupon rate is calculated as follows:

\[ \text{Coupon Rate} = \left( \frac{\text{Annual Coupon Payment}}{\text{Face Value}} \right) \times 100 \]

Substituting the given values:

\[ \text{Coupon Rate} = \left( \frac{60}{1000} \right) \times 100 \]

\[ \text Coupon Rate} = 0.06 \times 100 \]

\[ \text{Coupon Rate} = 6\% \]

So, the bond's coupon rate is 6%. It's important to note that the bond is selling for $900, which is below its face value of $1,000. This discount influences the effective yield of the bond. While the coupon rate is 6%, investors purchasing the bond at $900 will actually receive a higher yield than the coupon rate, as the annual interest represents a larger percentage of the lower purchase price. In this case, the bond's effective yield is approximately 6.67%, making it a more attractive investment than its nominal coupon rate might suggest.

User Charles Xu
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