Question

Nikita Enterprises has bonds on the market making annual payments, with twelve years to maturity, a par value of $1,000, and selling for $972. At this price, the bonds yield 7.1 percent. What must the coupon rate be on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The coupon rate on the bonds must be 8%.

Step-by-step explanation:

The coupon rate on the bonds of Nikita Enterprises must be 8%.

The coupon rate is the annual interest payment as a percentage of the bond's par value.

In this case, the bond has a par value of $1,000 and is selling for $972, which means the bond is selling at a discount.

To calculate the coupon rate, we can use the formula: Coupon rate = Annual interest payment / Par value of the bond.

Since the bond is selling for $972, we can determine that the annual interest payment is ($1000 - $972) = $28.

Therefore, the coupon rate is 28/1000 = 0.028 or 2.8%.