Question

McConnell Corporation has bonds on the market with 22.5 years to maturity, a YTM of 6.9 percent, a par value of $1,000, and a current price of $1,057. The bonds make semiannual payments. What must the coupon rate be on these bonds

Answer 1

7.40%

Step-by-step explanation:

The coupon rate of the bond can be calculated as follows

Formula:
`p= C * (1 - (1)/((1 + i)^(n)))/(i) + (M)/((1 + i)^(n))`

DATA

M = $1000

n = 22.5 *2 =45 semi-annual periods,

i = 6.9%/2 = 3.45% (semi-annually)

P = $1,057

Solution

1057 =
`C * (1 - (1)/((1 + 0.0345)^(45)))/(0.0345) + (1000)/((1 + 0.0345)^(45))`

1057 = C * 22.69 + 217.33

839.67 + C * 22.69

C = $37.01 This is a semi-annual coupon

Annual Coupon = 2 * $37.01 = $74.02

Annual Coupon Rate = 7.40%