Volbeat Corporation has bonds on the market with 12.5 years to maturity, a YTM of 9.8 percent, and a current price of $949. The bonds make semiannual payments.

Volbeat Corporation has bonds on the market with 12.5 years to maturity, a YTM of 9.8 percent, and a current price of $949. The bonds make semiannual payments.

Required:

What must the coupon rate be on the bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Coupon rate

%

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 = $949 = C(PVIFA4.90%,25) + $1,000(PVIF4.90%,25)

Solving for the coupon payment, we get:

C = $45.42

Since this is the semiannual payment, the annual coupon payment is:

2 × $45.42 = $90.84

And the coupon rate is the coupon rate divided by par value, so:

Coupon rate = $90.84 / $1,000

Coupon rate = .0908, or 9.08%

Calculator Solution:

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

Enter

12.5 × 2

9.8% / 2

±$949

$1,000

N

I/Y

PV

PMT

FV

Solve for

$45.42

Annual coupon = $45.42 × 2

Annual coupon = $90.84

Coupon rate = $90.84 / $1,000

Coupon rate = 9.08%