Question
In: Economics
Explain the difference between the terms face value, coupon rate and price of a bond. Which...
Explain the difference between the terms face value, coupon rate and price of a bond. Which of these three can never change?
Solutions
Expert Solution
Face value of the bond is the actual value of the bond, most of the time this value of written on the bond that is why the name face value, price of the bond is at which the bond is brought, for example a bond of the face value $100 can be sold at a price of $900 if the interest rate is 10%. i.e. the bond is sold at $900 and the person holding the bond will get paid $1000 face value when the term matures of the bond.
Coupon rate is the return that the person is getting, here in the above example the coupon rate is $100. the face value of the bond is never going to change only the price and coupon rate will change depending on the interest rate.
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