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20 September, 08:16

Shannon purchases a bond for $952.00. The bond matures in 3 years, and Shannon will redeem it at its face value of $1,000. Coupon payments are paid annually. If Shannon will earn a yield of 12%/year compounded yearly, what is the bond coupon rate?

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  1. 20 September, 09:34
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    The bond coupon rate is 10.112%

    Explanation:

    We first apply the formula for yield to maturity (YTM) to calculate the coupon payment. Next, we calculate the bond coupon rate.

    Step 1 - Calculation of Coupon Payment

    YTM = [C + (F-P) / n] / [ (F+P) / 2]

    The provided values are:

    YTM = 12% = 0.12

    C = Coupon payment = ?

    F = Face value = $1000

    P = Present value = $952

    n = Years to maturity = 3

    Applying these values in the above formula,

    0.12 = [C + (1000 - 952) / 3] / [ (1000+952) / 2]

    0.12 = [C + 16] / 976

    C = (976 x 0.12) - 16

    C = 101.12

    Step 2 - Calculation of bond coupon rate

    Coupon rate = Coupon payment / Face value

    Coupon rate = 101.12 / 1000

    = 10.112%
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