Question

Rebook Inc has bonds that have 8 years remaining to maturity, a YTM of 5.1 percent, and a current price of $964. The bonds make semiannual payments. What must the coupon rate be on these bonds?

Answer 1

The coupon rate on these bonds must be 8%.

Step-by-step explanation:

The coupon rate on these bonds must be 8%.

When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value.

In this case, the bonds have a current price of $964 and a yield to maturity of 5.1%. Using the formula for yield to maturity, we can calculate that the bond's future cash flows would result in an expected return of 12%.

Since the bond is priced at a discount and offers a higher yield than the market interest rate, the coupon rate must be higher than the yield to maturity. Therefore, the coupon rate on these bonds must be 8%.