2624 Principles of banking and financeLet me give an example of a coupon bond: assume that a company issues athree-year bond with a coupon rate of 5 per cent and face value of $1,000.The bondholder receives the following ($) cash flows (note the semi-annualcoupon payments which are each half the total annual coupon):Year0.51.01.52.02.53.0Cash flows ($)25252525251,025Certain other popular bond types differ from standard coupon bonds alongcertain dimensions. These include: perpetual bonds, floating rate bonds andindex-linked bonds. Perpetualbonds (also known as consols) never mature.They simply pay coupons of a specified amount forever. Floating ratebondshave coupon rates which vary over the bond’s lifetime. Generally, thefloating coupon rate is set at a premium over some market interest rate (e.gLIBOR or the US T-bill rate) and is reset on a pre-specified basis. For index-linked bonds, coupons and principal grow in line with inflation (in therelevant country). First issued in the UK, they are now increasingly frequently
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