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26 July, 11:18

You are purchasing a 20-year, semi-annual bond with a current market price of $973.64. If the yield to maturity is 8.68 percent and the face value is $1,000, what must the coupon payment be on the bond

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  1. 26 July, 11:35
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    The correct answer for Coupon Payment (semi annual) = $42.

    Explanation:

    According to the scenario, the given data are as follows:

    Time period = 20 years

    Time period (semi annual) (t) = 40

    Face value = $1,000

    Current market price = $973.64

    Yield to maturity = 8.68%

    Yield to maturity (semi annual) = 4.34%

    Coupon Payment = CP

    So, we can calculate the coupon payment by following computation:

    973.64 = CP * (1 - (1+4.34%) - 400:4.34% + 1000 : (1+4.34%) 40

    973.64 - 182.796 = CP * 18.83

    So, Coupon Payment = (973.64 - 182.796) : 18.83

    = $42

    So the coupon rate can be calculated as:

    Coupon rate (yearly) = 42*2 : 1000 = 8.4%
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