The formula to calculate the Coupon Rate is:
\[ \text{Coupon Rate} = \left( \frac{\text{Annual Coupon Payment}}{\text{Face Value}} \right) \times 100\% \]
The coupon rate is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond's face value. It tells you how much the coupon payments are relative to the face value, which is the money you lend to acquire the bond.
Let's assume the following for Bond A:
Step 1: Determine the face value:
The face value is given as $1,000.
Step 2: Calculate the annual coupon payment:
\[ \text{Annual Coupon Payment} = \$25 \times 2 = \$50 \]
Step 3: Calculate the coupon rate:
\[ \text{Coupon Rate} = \left( \frac{\$50}{\$1,000} \right) \times 100\% = 5\% \]
Therefore, the coupon rate for Bond A is 5%.
