Question

Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute the coupon rate on this bond. (In practice, we generally are not asked to find coupon rates.) (Hint: Substitute and solve for the coupon payment.)

Answer 1

Answer: The coupon rate is 13%

Explanation:

We would first calculate the Coupon Payment and then later using the coupon payment we would compute the Coupon rate.

PV = $\frac{FV}{(1+r)^{N} }$ + A [$[\frac{1-\frac{1}{(1+r)^{N} } }{r} ]$]

Where,

FV = $1,000

PV = $1,291.31

r = 8%

N = 8 Years

A = Coupon Payment

1291.31 = $\frac{1000}{(1+0.08)^{8} }$ + A $[\frac{1-\frac{1}{(1+0.08)^{8} } }{0.08} ]$

Solve for A

A = 130.69

The coupon payment is $130

Coupon rate = (Coupon payment / Face value) x 100

                     = $\frac{130}{1000}$ x 100

                     = 13 %