Ghost Rider Corporation has bonds on the market with 8 years to maturity, a YTM
ID: 2714489 • Letter: G
Question
Ghost Rider Corporation has bonds on the market with 8 years to maturity, a YTM of 5 percent, and a current price of $945. What must the coupon rate be on the company’s bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Ghost Rider Corporation has bonds on the market with 8 years to maturity, a YTM of 5 percent, and a current price of $945. What must the coupon rate be on the company’s bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Coupon rate = interest rate / par value
= $42.08 / $1000
= 4.21
Note: Assume par value of bond = $1000
Present value Principal = 1000 / (1+0.05)8
= 1000 / (1.05)8
= $675.68
Present value coupon = current price - PV principal
= $945 - $675.68
= $269.32
Coupon Amount = (present value coupon * yield )
{1 - (1 / 0.05)8 }
= (269.32 * 0.05) / ( 1- 0.68)
= 13.466 / 0.32
= $42.08
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