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Difficulty: MediumDebt Securities and Bond Structure

A corporate bond with a par value of $1,000\$1,000 currently trades at a secondary market price of $960\$960 and offers a current yield of 6.25%6.25\%. What is the annual coupon rate (stated nominal yield) of this bond expressed as a percentage?

Answer: 6 %

Answer

The annual coupon rate (stated nominal yield) of the bond is 6.0%.
The current yield of a bond equals the annual dollar interest payment divided by the current market price. Given a market price of $960\$960 and a current yield of 6.25%6.25\%, the bond pays $960×0.0625=$60\$960 \times 0.0625 = \$60 in annual interest. To find the stated nominal yield (annual coupon rate), divide the annual interest payment by the bond's face value ($1,000\$1,000): $60$1,000=6.0%\frac{\$60}{\$1,000} = 6.0\%.

Step-by-Step Solution

1
Determine the annual dollar interest payment using the market price and current yield.
Annual interest payment = 960∗0.0625=960 * 0.0625 = 60.
Current yield is defined as the annual dollar interest divided by the current market price.
2
Calculate the stated nominal yield (coupon rate) relative to par value.
Coupon rate = (60/60 / 1,000) * 100% = 6.0%.
The nominal yield is fixed at issuance as a percentage of the bond's par value ($1,000).

Key Concept

Relationship between nominal yield, current yield, market price, and par value in bond pricing.
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Topics

Debt Securities and Bond Structure

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