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25percentinto equationgivesanewcouponrateof625percent

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Unformatted text preview: d with a face value of $1,000, which can be purchased for $952.38 or a one-year 5% semi-annual coupon bond trading at its face value of $1,000. If you bought the zero-coupon bond for $952.38, you If would receive $1,000 at maturity, which is a gain of 5% ($47.62/$952.38). If you bought the coupon bond, you would have If received two coupon payments of $25 each during the year for a total of $50, which also represents a 5% gain ($50/$1,000). So in this case, no matter which bond you buy, you will So get the same return, even though the source of the return get is different. This is not always true, as each case is 33 33 Characteristics of Bond Floating rate bonds­ A floating rate bond is a bond that pays a variable rate of interest. Several factors influence the coupon rate including the type, maturity, and quality of the bond. The coupon rates on floating­rate securities are reset periodically, typically every 6 or 12 months, depending on interest rate conditions in the market. The coupon setting process typically starts with a reference rate, such as the rate on specific US Treasury securities or the London in...
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