Zerocouponbondsarepurchasedatalarge

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: . 28 28 Characteristics of Bond Coupon and Coupon Rate Calculating the coupon interest rate involves dividing the annual coupon (I) by the maturity or par value of the bond (M). Assume that a bond has an 8 percent coupon rate and a par value of $1,000. What is the annual interest payment? Solution: Substituting c = 0.08 and M = $1,000 into Equation above the annual cash interest payment is: I = 0.08($1,000) = $80 29 29 Characteristics of Bond Many bonds issued outside of the US pay interest payments on an annual basis. These bonds are annual­ pay bonds. In contrast, most corporate bonds in the US pay interest semiannually and are semiannual­pay bonds. If the bond in Example above were a semiannual­pay bond, the interest payments would be $40 every 6 months. Bonds often differ based on the kinds of coupons they carry. Two common bonds with different coupon rate structures are zero­coupon bonds and floating­rate bonds. 30 30 Characteristics of Bond The difference between a zero­coupon bo...
View Full Document

Ask a homework question - tutors are online