Question

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent (Kd), and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond.

What is the annual coupon interest rate?

a.8%

b.6%

c.4%

d.2%

e.0%

Answer 1

correct option is c.4%

Step-by-step explanation:

given data

maturity value = $1,000

nominal rate of return r = 10 percent = 5 % semi annually = 0.05

mature time t = 5 years = 10 semi annually

current market value = $768

solution

we apply here present value formula that is

present value = coupon rate × maturity value ×
`(1-(1+r)^(-t))/(r)` +
`(mature\ value)/((1+r)^(-n))` ..............1

put here value and we get

$768 = coupon rate × $1000 ×
`(1-(1+0.05)^(-10))/(0.05)` ×
`(1000)/((1+0.05)^(-10))`

solve it we get

coupon rate = 1.99549 % Semi-annual

so here annual coupon interest rate is = 2 × 1.99549 %

annual coupon interest rate is 3.99 = 4%

so correct option is c.4%