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26 November, 04:14

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate

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  1. 26 November, 04:34
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    The Coupon rate is 11.66%

    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 = $1,382.01

    Number of payment = n = 14 years

    Bond Yield = 7.5%

    The coupon rate can be calculated using following formula

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

    7.5% = [ C + ($1,000 - 1,382.01) / 14 ] / [ ($1,000 + $1,382.01) / 2 ]

    7.5% = [ C - $27.29 ] / $1,191

    7.5% x $1,191 = C - $27.29

    $89.33 = C - $27.29

    C = $89.33 + $27.29 = $116.62

    Coupon rate = $116.62 / $1,000 = 0.11662 = 11.66%
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