DMA Corporation has bonds on the market with 18.5 years to maturity, a YTM of 7.9 percent, and a current price of $1,067. The bonds make semiannual payments and have a par value of $1,000.

DMA Corporation has bonds on the market with 18.5 years to maturity, a YTM of 7.9 percent, and a current price of $1,067. The bonds make semiannual payments and have a par value of $1,000.

What must the coupon rate be on these bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded 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 = $1,067 = C(PVIFA3.95%,37) + $1,000(PVIF3.95%,37)

Solving for the coupon payment, we get:

C = $42.98

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

2 × $42.98 = $85.95

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

Coupon rate	=	$85.95 / $1,000
Coupon rate	=	.0860, or 8.60%