Question

AB Builders, Inc., has 24-year bonds outstanding with a par value of $2,000 and a quoted price of 97.842. The bonds pay interest semiannually and have a yield to maturity of 6.80 percent. What is the coupon rate

Answer 1

6.62%

Step-by-step explanation:

Calculation for What is the coupon rate

First step is to calculate the semi-annual coupon payment on the bond using the formula for pmt in excel

= pmt(rate,nper,-pv,fv)

Rate = 6.80% / 2

Rate= 3.40%

nper = 24 *2

nper = 48

pv = 97.842%*2000

PV=$1,956.84

fv = $2000

Hence,

= pmt(3.40,48,-1956.84,2000)

pmt=66.164

Semi annually coupon payment = $66.164

Second step is to calculate Annual coupon payment

Annual coupon payment = 66.164 * 2

Annual coupon payment=$132.33 annually

Last step is to calculate the Coupon rate using this formula

Coupon rate = Annual Coupon Payment / Bond Par value * 100

Let plug in the formula

Coupon rate =132.33 / 2000

Coupon rate =6.62%

Therefore the coupon rate is 6.62%