Shannon purchases a bond for $952.00. The bond matures in 3 years, and Shannon will redeem it at its face value of $1,000. Coupon payments are paid annually. If Shannon will earn a yield of 12%/year compounded yearly, what is the bond coupon rate?

The bond coupon rate is 10.112%

Explanation:

We first apply the formula for yield to maturity (YTM) to calculate the coupon payment. Next, we calculate the bond coupon rate.

Step 1 - Calculation of Coupon Payment

YTM = [C + (F-P)/n] / [(F+P)/2]

The provided values are:

YTM = 12% = 0.12

C = Coupon payment  = ?

F = Face value  = $1000

P = Present value =  $952

n = Years to maturity = 3

Applying these values in the above formula,

0.12 = [C + (1000 - 952)/3] / [(1000+952)/2]

0.12= [C + 16] / 976

C = (976 x 0.12) - 16

C = 101.12

Step 2 - Calculation of bond coupon rate

Coupon rate = Coupon payment / Face value

Coupon rate = 101.12 / 1000

                     = 10.112%

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