Cold Boxes Ltd.has 100 bonds outstanding (maturity value = $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.What is the annual coupon interest rate?
A) 8%
B) 6%
C) 4%
D) 2%
E) 0%

Question

Quizplus · Accepted Answer

To find the annual coupon interest rate, we need to use the formula:

PV = (C/r) x [1 - (1/(1+r)^n)]

Where PV is the current market value of the bond, C is the annual coupon payment, r is the required rate of return, and n is the number of years to maturity.

Plugging in the given values, we get:

$768 = (C/0.05) x [1 - (1/(1+0.05)^10)]

Solving for C, we get:

C = $40

Therefore, the annual coupon interest rate is:

C/MV x 100% = $40/$1,000 x 100% = 4%

Hence, the best choice is C) 4%.