Question

Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute the coupon rate on this bond. (In practice, we generally are not asked to find coupon rates.) (Hint: Substitute and solve for the coupon payment.)

Answer 1

Answer: The coupon rate is 13%

Step-by-step explanation:

We would first calculate the Coupon Payment and then later using the coupon payment we would compute the Coupon rate.

PV =
`(FV)/((1+r)^(N) )` + A [
`[(1-(1)/((1+r)^(N) ) )/(r) ]`]

Where,

FV = $1,000

PV = $1,291.31

r = 8%

N = 8 Years

A = Coupon Payment

1291.31 =
`(1000)/((1+0.08)^(8) )` + A
`[(1-(1)/((1+0.08)^(8) ) )/(0.08) ]`

Solve for A

A = 130.69

The coupon payment is $130

Coupon rate = (Coupon payment / Face value) x 100

=
`(130)/(1000)` x 100

= 13 %