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Unformatted text preview: coupon rate of 5%, then it pays total coupons of $50 per year. For the typical bond, this will consist of semi­annual payments of $25 each If interest rates move above (below) the bond’s coupon rate, the bond will sell below (above) its par value. A bond that trades below its par value sells at a discount; a bond that sells above its par value trades at a premium. 25 25 Characteristics of Bond 26 26 Characteristics of Bond Suppose the ABC company offers a new issue of bonds carrying a 7% coupon. This means it would pay you $70 a year in interest. After evaluating your investment alternatives, you decide this is a good deal, so you purchase a bond at its par value, $1,000 What if Rates Go Up? Now let's suppose that later that year, interest rates in general go up. If new bonds costing $1,000 are paying an 8% coupon ($80 a year in interest), buyers will be reluctant to pay you face value ($1,000) for your 7% ABC bond. In order to sell, you'd have to offer your bond at a lower price – a discount ...
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