Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. Which of the following is the annual coupon interest rate?

Question

Quizplus · Accepted Answer

The market value of the bond is given as $768, which is less than the face value of $1,000. This indicates that the bond is selling at a discount, meaning the coupon rate is less than the required rate of return. We can use the bond pricing formula to calculate the coupon rate:

$768 = C * (1 - 1/(1 + 0.10/2)^10) / (0.10/2) + 1000 / (1 + 0.10/2)^10

where C is the semi-annual coupon payment. Solving for C, we get C = $40. The annual coupon payment is twice the semi-annual payment, so the annual coupon interest rate is:

$80 / $1,000 = 0.08 or 8%

Cold Boxes Corporation Has 100 Bonds Outstanding with a Maturity