Question

1. If a lender makes a simple loan of $500 for one year and charges 6%, how much will the lender receive at maturity? If a lender makes a simple loan of $500 for one year and charges $40 interest, what is the simple interest rate on that loan?

2. What is a bond’s coupon rate? Does it change over the life of the bond? If a bond’s yield to maturity exceeds its coupon rate, what is its price compared to par (or face value)? Why?

Answer 1

Answer 1:

Principle amount (P)=$500.

Rate of interest(R)=6% and

Period of loan(T)=1 year then interest amount=P*R*T/100=$500*6*1/100=$30.

If interest amount is $40 then $40=$500*R*1/100. So, Simple interest rate R=8%

Answer 2:

Coupon Rate is the amount of interest given every year to the owner of the bond by the issuing company/institution. Coupon rate remains remains same over the life of the bond. If a bond's yield to maturity exceeds its coupon rate, it's price will be higher than the par value. This is because the interest amount received or to be received increases due to higher yield to maturity, so the price of the bond also increases.