Question

Nolan has a bond with a 6.1% yield, a bid price of $475, and a face value of $500. What is the original coupon rate of this Bond?

Answer 1

Answer:

5.8%

Step-by-step explanation:

Current yield = 6.1%

Face value of bond = $500

Market price of bond = $475

Let the original coupon rate be CR

$Current\hspace{2}yield = \frac{Coupon\hspace{2}rate* Bond\hspace{2}face\hspace{2}value}{Market\hspace{2}price}*100$

$6.1 = \frac{CR*500}{475}*100$

Multiply both sides by 475

$6.1 *475 = \frac{CR*500}{475}*100*475$

Cancel out the 475's from the top and bottom of the right side

$6.1 *475 = CR*500*100$

$2897.5 = CR*50000$

Flip the sides

$CR*50000 = 2897.5$

Divide both sides by 5000

$\frac{CR*50000}{50000} = \frac{2897.5}{50000}$

Cancel out 50000 from the top and bottom of the left side

$CR = 0.0579$%

CR = 0.0579 * 100      [convert decimal into a percentage]

CR = 5.79 %

CR = 5.8% [rounded off to the tenth place]

Answer 2

Answer:  The correct answer is:  5.8%

Step-by-step explanation: