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28 April, 02:27

abriele Enterprises has bonds on the market making annual payments, with 19 years to maturity, a par value of $1,000, and selling for $910. At this price, the bonds yield 7.8 percent. What must the coupon rate be on the bon

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  1. 28 April, 02:36
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    The coupon rate on the bond must be 6.98%

    Explanation:

    Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.

    Face value = F = $1,000

    Selling price = P = $910

    Number of payment = n = 19 years

    Bond Yield = 7.8%

    The coupon rate can be calculated using following formula

    Yield to maturity = [ C + (F - P) / n ] / [ (F + P) / 2 ]

    7.8% = [ C + ($1,000 - $910) / 19 ] / [ ($1,000 + $910) / 2 ]

    7.8% = [ C + $4.74 ] / $955

    7.8% x $955 = C + $4.74

    $74.49 = C + $4.74

    C = $74.49 - $4.74 = $69.75

    Coupon rate = 69.75$ / $1,000 = 0.06975 = 6.975%
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