Question

Big Canyon Enterprises has bonds on the market making annual payments, with 18 years to maturity, a par value of $1,000, and a price of $955. At this price, the bonds yield 9.2 percent. What must the coupon rate be on the bonds?

Answer 1

The correct answer is 8.679%.

Step-by-step explanation:

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

Face value (F) = $1,000

Bond value (B)= $955

Time (t) = 18 years

Yield (r) = 9.2%

First we calculate the coupon payment:

Let coupon payment = C

then,

B = C ×
`(1 - (1)/((1+r)^(t) ) )/(r) + (F)/((1+r)^(t) )`

By putting the value, we get

$955 = C×
`(1 - (1)/((1+0.092)^(18) ) )/(0.092) + (1000)/((1+0.092)^(18) )`

$955 = C × 8.64 + 205.11

C = 86.79

So, Coupon Rate = Coupon Payment ÷ Face value

= 86.79 ÷ 1000

= 0.08679

= 8.679%