Question

McConnell Corporation has bonds on the market with 16.5 years to maturity, a YTM of 6.3 percent, a par value of $1,000, and a current price of $1,036. The bonds make semiannual payments. What must the coupon rate be on these bonds

Answer 1

6.52%

Step-by-step explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

As per Given Data

Face value = F = $1,000

Selling price = P = $1,036

Number of periods = n = 16.5 years x 2 = 33 periods

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

As we have the YTM, We need to calculate the Coupon Payment using YTM formula.

6.3% = [ C + ( $1,000 - 1,036 ) / 33 ] / [ ( $1,000 + 1,036 ) / 2 ]

6.3% = [ C - $1.09 ] / $1,018

C - $1.09 = $1,018 x 6.3%

C - $1.09 = $64.134

C = $64.134 + 1.09 = $65.224

Coupon Rate = 65.224 / $1,000 = 0.065224 = 6.5224%