Merton Enterprises has bonds on the market making annual payments, with 15 years to maturity, and selling for $971. At this price, the bonds yield 8.3 percent.

Merton Enterprises has bonds on the market making annual payments, with 15 years to maturity, and selling for $971. At this price, the bonds yield 8.3 percent.

Required:

What must the coupon rate be on Merton’s bonds? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16). )

Coupon rate

%

rev: 05-02-2011

Explanation:

Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows:

P = $971 = C(PVIFA8.3%,15) + $1,000(PVIF8.3%,15)

Solving for the coupon payment, we get:

C = $79.55

The coupon payment is the coupon rate times par value. Using this relationship, we get:

Coupon rate = $79.55 / $1,000

Coupon rate = 0.0795 or 7.95%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

15

8.3%

±$971

$1,000

N

I/Y

PV

PMT

FV

Solve for

$79.55

Coupon rate = $79.55 / $1,000

Coupon rate = 0.0795 or 7.95%