You are interested in a $1,000, 20-year bond that is currently selling for $1,171.59. If you require a 10% return on your investment, what is the minimum coupon rate you can accept? The bond makes semiannual coupon payments.

Question

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To find the minimum coupon rate, we need to calculate the yield to maturity (YTM) that equates the present value of the bond's cash flows to its current price. Given the bond's price of $1,171.59, a face value of $1,000, a 20-year term, and semiannual payments, the YTM is 8% per period (or 4% semiannually). To achieve a 10% annual return, the bond must have a coupon rate of at least 12% (or 6% semiannually).

You Are Interested in a $1,000, 20-Year Bond That Is