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Math Help - How to find the required rate of return for a coupon bond?

  1. #1
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    Question How to find the required rate of return for a coupon bond?

    Given the present value, coupon rate, face value, and term of a coupon bond, is there any easy way of finding the required rate of return without guessing or using a computer to find it for you?

    Here is an example:
    I am given that the present value of the bond is $105.35, the coupons are paid annually and are 8%, that the face value is $100.00 and that there are three years left to maturity (with the next payment being one year from now).

    I get from this the equation How to find the required rate of return for a coupon bond?-equation1.png
    How do I find k?
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  2. #2
    MHF Contributor
    Joined
    Dec 2007
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    Ottawa, Canada
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    Re: How to find the required rate of return for a coupon bond?

    Can't be solved directly; numeric method required

    Works a bit like a loan:
    Code:
    YR  PAY'T      INT      BALANCE
    0                        105.35
    1   -8.00       ?          ?
    2   -8.00       ?          ?
    3   -8.00       ?        100.00
    You can tell that interest has to be lesser than 8%;
    6% will do it: try it!
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