Question

Henley Corporation has bonds on the market with 12 years to maturity, a YTM of 9.7 percent, a par value of $1,000, and a current price of $948. The bonds make semiannual payments. What must the coupon rate be on the bonds

Answer 1

8.96%(9.0% rounded to 1 decimal place since YTM of 9.7% was also to 1 decimal place)

Step-by-step explanation:

In ascertaining the coupon rate, we need to, first of all, determine the semiannual coupon payment(since the bond pays coupons on a semiannual basis) of the bond using a financial calculator bearing in mind that the calculator would be set to its default end mode before making the following inputs:

N=24(number of semiannual coupons in 12 years left to maturity=12*2=24)

I/Y=4.85(semiannual yield to maturity without the "%" sign=9.7%/2=4.85%)

PV=-948( the current bond price of $948 shown as a negative since it is an outflow of cash for the bond investor)

FV=1000(the bond face value of $1000)

CPT

PMT=$44.79

semiannual coupon=face value*coupon rate/2

$44.79=$1000*coupon rate/2

$44.79*2==$1000*coupon rate

$89.58=$1000*coupon rate

coupon rate=$89.58/$1000

coupon rate=8.96%