Question

Big Canyon Enterprises has bonds on the market making annual payments, with 12 years to maturity, a par value of $1,000, and a price of $1,030. At this price, the bonds yield 6.14 percent. What must the coupon rate be on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

To find the coupon rate on the bonds, calculate the annual interest payment relative to the bond's par value. In this case, the coupon rate is approximately 6.32%.

Step-by-step explanation:

To calculate the coupon rate on the bonds, we need to find the annual interest payment relative to the bond's par value. The bond's yield, which is given as 6.14 percent, reflects the total return on the bond, including both interest payments and capital gains.

We can calculate the annual interest payment by multiplying the yield by the bond's price, which is $1,030 in this case. The result is $63.22. The coupon rate is then calculated by dividing the annual interest payment by the bond's par value and multiplying by 100 to get a percentage. In this case, the coupon rate is approximately 6.32%.