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4 December, 10:50

Gabriele Enterprises has bonds on the market making annual payments, with eleven years to maturity, a par value of $1,000, and selling for $958. At this price, the bonds yield 6.4 percent. What must the coupon rate be on the bonds

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  1. 4 December, 11:19
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    Coupon rate on the bonds can be calculated in the following way.

    Explanation:

    To find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows:

    P = $958 = C (PVIFA₆.₄₀%,11) + $1,000 (PVIF₆.₄₀%,11)

    Solving for the coupon payment, we get:

    C = $58.57

    The coupon payment is the coupon rate times par value. Using this relationship, we get:

    Coupon rate = $58.57/$1,000

    Coupon rate =.0586, or 5.86%

    Calculator Solution:

    Enter 11 6.40 ±$958 $1000

    N l/Y PV PMT FV

    $58.57

    Coupon rate = $58.57/$1,000

    Coupon rate =.0586, or 5.86%
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