Question

Coupon Rates [ LO2] Nikita Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $962. At this price, the bonds yield 5.1 percent. What must the coupon rate be on the bonds

Answer 1

The coupon rate on the bonds of $1,000 par value, selling at $962 and with a bond's yield of 5.1% at this price, is 4.91%.

What is the coupon rate?

The coupon rate is the annual payment divided by the face or par value.

The coupon rate represents the annual yield that the investor in a bond receives.

Data and Calculations:

N (# of periods) = 8 years

I/Y (Interest per year or Yield) = 5.1%

PV (Present Value or Price) = $962

FV (Future Value) = $1,000

Results:

Annual PMT = $49.06 ($962 x 5.1%)

Coupon rate = 4.91% ($49.06/$1,000 x 100)

The coupon rate on the bonds of $1,000 par value, selling at $962 and with a bond's yield of 5.1% at this price, is 4.91%.

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