Question

You are purchasing a 20-year, semi-annual bond with a current market price of $973.64. If the yield to maturity is 8.68 percent and the face value is $1,000, what must the coupon payment be on the bond

Answer 1

The correct answer for Coupon Payment (semi annual) = $42.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Time period = 20 years

Time period (semi annual) (t) = 40

Face value = $1,000

Current market price = $973.64

Yield to maturity = 8.68%

Yield to maturity ( semi annual) = 4.34%

Coupon Payment = CP

So, we can calculate the coupon payment by following computation:

973.64 = CP× (1-(1+4.34%) - 400÷4.34% + 1000 ÷ (1+4.34%)40

973.64 - 182.796 = CP *18.83

So, Coupon Payment = (973.64 - 182.796) ÷ 18.83

= $42

So the coupon rate can be calculated as:

Coupon rate ( yearly) =42×2 ÷ 1000 = 8.4%