Answer:
Coupon rate should be 8.6%
Explanation:
Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity.
Face value = F = $1,000
Coupon payment = $1,000 x 8.5% / 2= $42.5
Selling price = P = $994
Number of payment = n = 14 years x 2 = 28 payment
Yield to maturity = [ 42.5 + ( $1,000 - 994 ) / 28 ] / [ ($1,000 + 994 ) / 2 ]
Yield to maturity = [ 42.5 + ( $1,000 - 994 ) / 28 ] / [ 1,994 ) / 2 ]
Yield to maturity = [ $42.5 + $0.21 ] / $997 = $42.71 /$997 = 0.043 = 4.3%
Yield to maturity = 4.3% x 2 = 8.6% per year
