A 5-year Circular File bond with a face value of $1,000 pays interest once a yea

Question

A 5-year Circular File bond with a face value of $1,000 pays interest once a year of $60 and sells for $952. a. What are its coupon rate and yield to maturity? (Do not round intermediate calculations. Enter the coupon rate as a percent rounded to 1 decimal place and the yield to maturity as a percent rounded to 2 decimal places.) Coupon rate 6 % Yield to maturity 7.18 % b. If Circular wants to issue a new 5-year bond at face value, what coupon rate must the bond offer? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Coupon rate 7 %

Explanation / Answer

The bond pays annually $60, so the Coupon rate = 60/1000 = 6%

Yield to maturity = YTM is given by rate formula in excel =rate(nper,pmt,pv,fv) where nper =5,pmt=60,pv=952,fv =1000

So YTM = rate(5,60,-952,1000) = 7.18%

If Circular wants to issue a new 5-year bond at face value, the coupon rate should be equal to the Yield to Maturity (YTM) = 7.18%.

For Bonds, the YTM must be equal to the coupon rate for the bonds to sell at face value . Hence coupon rate should be the YTM = 7.18% . SInce coupon are always issued as a whole %, this can be treated as 7.00%

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