A five-year annual pay bond is quoted at 93.011 with a market yield of 8%.The coupon rate on this bond issue is:

Question

Quizplus · Accepted Answer

To find the coupon rate, we need to use the formula for present value of a bond:

PV = C/(1+r)^1 + C/(1+r)^2 + ... + C/(1+r)^n + F/(1+r)^n

Where:
PV = current market price of the bond = 93.011
C = annual coupon payment
r = market yield/required return = 8%
n = number of periods = 5

Substituting the given values, we get:

93.011 = C/(1+0.08)^1 + C/(1+0.08)^2 + C/(1+0.08)^3 + C/(1+0.08)^4 + C/(1+0.08)^5 + 100/(1+0.08)^5

Solving for C, we get:

C = 6.25

Therefore, the coupon rate on this bond issue is 6.25%. The best choice is option B.

A Five-Year Annual Pay Bond Is Quoted at 93