Question

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate? a. 6.27% b. 7.70% c. 7.32% d. 6.95% e. 6.60%

Answer 1

Answer:

The correct option is B,7.70%

Explanation:

Annual coupon interest rate=coupon payment/face value

the coupon payment is the semi-annual interest payment*2

the semi-annual interest payment can be computed using the pmt formula in excel:

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

rate is the semi-annual yield to maturity which is 9.25%/2=4.625%

nper is the number of semi-annual interest payable by the bond which is 25*2=50

pv is the current price of the bond which is $850

fv is the face value of the bond at $1000

=pmt(4.625%,50,-850,1000)

pmt=$38.50

annual interest =$38.50*2=$77.00

Annual coupon interest=$77/$1000=7.7%