The current required rate of return on a bond issued by Who LTD is 10 percent. \
ID: 2792861 • Letter: T
Question
The current required rate of return on a bond issued by Who LTD is 10 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?
The current required rate of return on a bond issued by Who LTD is 10 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?
The current required rate of return on a bond issued by Who LTD is 10 percent. "Who" has a bond issue outstanding that pays interest semiannually, is selling for $845 and matures in 8 years. What is the approximate coupon rate on the outstanding bond?
Explanation / Answer
Ans. Calculation of bond coupon rate
Face value of bond $1000 (Assume) and Redeem at par
Required rate of return is 10% and semiannual is 5%
Maturity of bond is 8yrs , no of coupon payment is 16
Cumulative PV @5% for 16 coupon payment = 10.84
PV @5% at the end of 16yr = .458
value of bond = coupon paymentXPV for 16yr+Redemption value XPv at the end period
$845 = Coupon paymentX10.84+1000X.458
$845 =Coupon payment X10.84+ $458
Coupon payment = 387/10.87 = $35.70 Semiannual payment
Semiannual Rate of coupon is = 3.57% and Annual Rate is 7.14%
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