Market Enterprises would like to issue $1,000 bonds and needs to determine the approximate rate it would need to pay investors. A firm with similar risk recently issued bonds with the following current features: a 5% coupon rate, 10 years until maturity, and a current price of $1,170.50. At what rate would Market Enterprises expect to issue bonds, assuming annual interest payments? Please round to the closest answer. (Solve this problem using either Excel's "Goal Seek" function, plug into tvm tables, or a financial calculator.)
A) 6%
B) 3%
C) 5%
D) 4%

Question

Quizplus · Accepted Answer

The bond with a 5% coupon rate is currently priced above its face value, indicating that the yield to maturity (YTM) is lower than the coupon rate. Using a financial calculator or Excel, the YTM is approximately 3%.

Market Enterprises Would Like to Issue $1,000 Bonds and Needs