Question

Problem 6-8 Bond Pricing (LO2) A 5-year Circular File bond with a face value of $1,000 pays interest once a year of $60 and sells for $988. a. What are its coupon rate and yield to maturity? (Do not round intermediate calculations. Enter the coupon rate as a whole percent and the yield to maturity as a percent rounded to 2 decimal places.) Coupon rate Yield to maturity b. If Circular wants to issue a new 6-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

Answer 1

(a)-Coupon Rate and Yield to Maturity of the Bond

Coupon Rate

Coupon Rate = [Annual Coupon Amount / Par Value] x 100

= [$60 / $1,000] x 100

= 6%

Yield to Maturity [YTM] of the Bond

Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

Face Value = $1,000

Bond Price = $988

Annual Coupon Amount = $60

Maturity Years = 5 Years

Therefore, Yield to Maturity [YTM] = Coupon Amount + [(Par Value – Bond Price) / Maturity Years] / [(Par Value + Bond Price)/2]

= [$60 + {($1,000 – $988) / 5 Years)] / [($1,000 + $988) / 2]

= [($60 + $2.40) / $994]

= 0.0629 or

= 6.29%

Therefore, Coupon Rate = 6%

Yield to Maturity = 6.29%

(b)- Coupon Rate that the Bond must offer

If the Bonds are issued at the Face Value, then the Coupon Rate would be equal to the Yield to Maturity of the Bond.

Therefore, the Coupon Rate must the Bond offer = 6.29%

“Coupon Rate = 6.29%”