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10 June, 05:20

Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate? a. 6.27% b. 7.70% c. 7.32% d. 6.95% e. 6.60%

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  1. 10 June, 05:43
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    The correct option is B, 7.70%

    Explanation:

    Annual coupon interest rate=coupon payment/face value

    the coupon payment is the semi-annual interest payment*2

    the semi-annual interest payment can be computed using the pmt formula in excel:

    =pmt (rate, nper,-pv, fv)

    rate is the semi-annual yield to maturity which is 9.25%/2=4.625%

    nper is the number of semi-annual interest payable by the bond which is 25*2=50

    pv is the current price of the bond which is $850

    fv is the face value of the bond at $1000

    =pmt (4.625%,50,-850,1000)

    pmt=$38.50

    annual interest = $38.50*2=$77.00

    Annual coupon interest=$77/$1000=7.7%
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