Question

American 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 coupon interest rate

Answer 1

Answer:

7.71%

Explanation:

Calculation to determine the bond's nominal coupon interest rate

First step is to determine the PMT using Financial calculator

FV = $1,000

N= 25 × 2 = 50 periods ( semi-annual)

i/y=9.25/2=4.63

PV= - 850

PMT=?

Hence,

PMT=38.55

Second step is to calculate the Annual coupon Payment

Annual coupon Payment =38.55x2

Annual coupon Payement= 77.10

Now let determine the bond's nominal coupon interest rate using this formula

Nominal coupon rate= Annual coupon payment/par value

Let plug in the formula

Nominal coupon rate=77.10/1000

Nominal coupon rate=7.71%

Therefore the bond's nominal coupon interest rate is 7.71%