The anticipated coupon rate on notes

timer Asked: Nov 12th, 2013

Question description

Using the regular Treasury note of problem 2:( A Treasury note paying an annual coupon of 5.06%. The other is a TIPS which pays 3% interest annually.

A.What is its price if investors’ required rate of return is 6.09 percent on similar bonds? Treasury notes pay interest semi-annually.

A 6% annual interest rate compounded semi-annually represents an effective rate of 6.09%. Therefore the coupon rate should be 6% + 3% = 9%. -

b. Erron Corporation wants to issue five- year notes but investors require a credit risk spread of 3 percentage points. What is the anticipated coupon rate on the Erron notes?

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