Sunshine Mining Bonds have a $1,000 face value,pay $95 annual interest,mature in 2004,and are currently quoted at $1,302.50.The coupon rate of interest is

Question

Quizplus · Accepted Answer

To find the coupon rate of interest, we need to divide the annual interest payment ($95) by the face value ($1,000) and then multiply by 100 to express it as a percentage:

Coupon rate = ($95/$1,000) x 100 = 9.5%

Since the bond is currently quoted at $1,302.50, we can also calculate its yield to maturity (YTM) using a financial calculator or Excel:

N = 14 (number of years to maturity)
PV = -$1,302.50 (negative because we're paying this amount to purchase the bond)
PMT = $95 (annual interest payment)
FV = $1,000 (face value)

Solving for the YTM, we get:

YTM = 6.5%

Since the YTM is lower than the coupon rate, the bond is trading at a premium. In other words, investors are willing to pay more than the face value to receive the bond's fixed interest payments.

Sunshine Mining Bonds Have a $1,000 Face Value,pay $95 Annual