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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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