Question

Consider a bond paying a coupon rate of 10% per year, compounded annually. Assume that the market interest rate (YTM or return on investments of like risk) is 15% per year. In other words you want a 15% return on the bond.   The bond has three years until maturity. The par value is $1,000. Assume that you buy the bond today for $885.84.

21)   What is the cash flow (interest only) that you want to receive each year (yr 1, yr 2, and yr 3) based on the 15% return?

1. $132.88
2. $150
3. $88.58
4. $100
5. None of above

Answer 1

The answer is (d) $100

(a) is incorrect because it were PMT if present value or price were $960.09

(b) is incorrect because it were PMT if the bond price was equal to the pay value of the bond that is $1000

(c) is incorrect because it were PMT if present value or price were $859.76

(e) is incorrect because (d) is correct

we can use financial calculator for calculating the coupon payment.

Financial calculator

PV= 885.84
FV =1000
1/Y=15

N=3

Compute PMT

PMT= 100.00055 or 100