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Coupon Rate: A $1,000 face value bond is currently quoted at 100.8. The bond pays semi-annual payments of $28.75 each and matures in 6 years. What is the coupon rate?

Answer :

Final answer:

The coupon rate is computed by doubling the semi-annual payment to get the annual coupon payment, then divided by the bond's face value, and multiplied by 100 to get the percentage. For a bond with a face value of $1,000 and semi-annual payments of $28.75, the coupon rate is 5.75%.

Explanation:

The coupon rate is a fixed percentage of the bond's face value which is paid as interest to the bondholder.

The coupon payments are made periodically until the bond matures. In this case, the bond has a face value of $1,000, pays semi-annual payments of $28.75, and matures in 6 years.

To find the coupon rate, we first calculate the annual coupon payment by multiplying the semi-annual payment by 2 (since there are two payments per year).

So, the annual coupon payment is $57.50 (2 * $28.75).

Then, we divide the annual coupon payment by the bond's face value and multiply the result by 100 to get the coupon rate in percentage. So, the coupon rate is 5.75% ($57.50 / $1000 * 100).

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