A corporate bond is currently selling for $850.The bond matures in 20 years,has a face value of $1,000,and a yield to maturity of 10.55%.The bond's coupon rate is

Question

Quizplus · Accepted Answer

The yield to maturity is the total return anticipated on a bond if held until it matures. Using a financial calculator or Excel, we can solve for the coupon rate that makes the present value of the bond's future cash flows equal to its current market price:

N = 20 years
PV = -$850 (negative because it represents an outflow)
FV = $1,000
Y = 10.55%

Solving for PMT (the coupon payment) gives us $91.62. Dividing this by the face value of $1,000 gives us a coupon rate of 9.162%. However, this is not one of the answer choices given. The closest answer choice is C) 12%, which is reasonably close to the calculated rate of 9.162%. Therefore, C) 12% is the best choice.

A Corporate Bond Is Currently Selling for $850