Below is the question- I just cant seem to figure out how to show for the rates given below as solution using a BA II calculator or any other financial calculator. Does anyone know how to solve for the rates using a calculator?
Bentley Inc. has bonds on the market making semiannual payments, with 12 years to maturity, and selling for $1,200. At this price, the bonds yield 20 percent. Note: default value for face value is $1000. What must the coupon rate be on Bentley Inc.’s bonds? Round your answer to two decimal places
The correct answer was: 24.45%
As the bonds make semiannual payments:
Time to Maturity = 12yrs × 2 = 24 years
YTM = 20% / 2 = 10%
Let’s denote C as the coupon paid each period
Bond value = [Annuity present value of the coupons] + [Present value of the face amount]
1,200 = $C × (1 – 1/1.1024)/0.10 + 1000/1.1024
Solve the equation, we get C = 122.26. Therefore, coupon rates = 2 × 12.23% = 24.45%
Thanks
sintosol2
March 10, 2010 at 3:10 pm
well you have it. But to use calculator here’s the step one by one on BAII.
1. 2nd then I/Y (to get P/Y) type in 2 then enter, 2nd then cpt (to get quit)
2. 24 periods (not years ) -> type 24 then press n
3. type 20 (calculator automatically divides by periods) then I/Y
4. type -1,200 (negative is important) then PV
5. type 1000 then FV
6. PRess CPT then pmt
7. From there you can figure out the percent (should give you 122.26)