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Lecture-4-Valuation+Bond

# Zerocouponbondsarepurchasedatalarge

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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...
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