Question

Kiss the Sky Enterprises has bonds on the market making annual payments, with 6 years to maturity, and selling for $840. At this price, the bonds yield 10.0 percent. What must the coupon rate be on the bonds?please explain answer..a. 5.17%b. 6.16%c. 5.27%d. 7.70%e. 10.34%

Answer 1

The coupon rate is 6.32% or nearest to b.6.16%.

Step-by-step explanation:

The price of the bond is equal to the present value of its principal repayment plus its annual coupon.

Denote: x is the coupon rate => Annual coupon payment is 1,000x

=> The price of the bond, with the yield to maturity at 10%, is calculated as below:

1,000/1.1^6 + 1,000x * (1 - 1.1^-6)/0.1 = 840 <=> 1,000x * (1 - 1.1^-6)/0.1 = 275.526 <=> 1,000x = 63.263 <=> x = 6.32%.

So, the coupon rate is 6.32% or nearest to b.6.16%.