Question

Gabriele Enterprises has bonds on the market making annual payments, with eleven years to maturity, a par value of $1,000, and selling for $958. At this price, the bonds yield 6.4 percent. What must the coupon rate be on the bonds

Answer 1

Coupon rate on the bonds can be calculated in the following way.

Explanation:

To find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows:

 

P = $958 = C(PVIFA₆.₄₀%,11) + $1,000(PVIF₆.₄₀%,11)

 

Solving for the coupon payment, we get:

C = $58.57

 

The coupon payment is the coupon rate times par value. Using this relationship, we get:

Coupon rate = $58.57/$1,000

Coupon rate = .0586, or 5.86%

 

Calculator Solution:

Enter                 11              6.40          ±$958                             $1000

                         N               l/Y              PV                  PMT         FV

                                                                                   $58.57

Coupon rate = $58.57/$1,000

Coupon rate = .0586, or 5.86%