26 24 Principles of banking and finance Let me give an example of a coupon bond: assume that a company issues a three-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-annual coupon payments which are each half the total annual coupon): Year 0.5 1.0 1.5 2.0 2.5 3.0 Cash flows ($) 25 25 25 25 25 1,025 Certain other popular bond types differ from standard coupon bonds along certain dimensions. These include: perpetual bonds, floating rate bonds and index-linked bonds. Perpetual bonds (also known as consols) never mature. They simply pay coupons of a specified amount forever. Floating rate bonds have coupon rates which vary over the bond’s lifetime. Generally, the floating coupon rate is set at a premium over some market interest rate (e.g LIBOR 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 the relevant country). First issued in the UK, they are now increasingly frequently
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This note was uploaded on 09/23/2009 for the course BUSI 101 taught by Professor Wormer during the Spring '08 term at Acton School of Business.