Question

For this week’s portfolio activity, please advise the instructor of the following:

• Utilizing the information provided in your course textbook(s) or other valid sources, briefly compare the coupon rate and the interest rate regarding bonds. What is a par value?
• Describe the impact of a tax shield on fixed income yields.
• Please provide a brief update to the instructor on how you feel you are doing so far this term.  

Answer 1

Coupon rate is computed on the face value of the bond while interest rate is computed on the basis of riskiness of lending the amount to the issuer of the bonds (i.e. the borrower). Secondly while coupon rates are decided by the issuer of the bonds interest rate is usually determined by the lender.

Par value can be defined as the face value of a bond. In other words it is the stated value per bond. It is the dollar amount that it will be worth when the bond reaches maturity.

Tax shield arises due to the fact that interest paid on fixed income instruments like bonds are tax deductible. Tax shield = amount of interest payment * tax rate. Tax shield affects fixed income yields by lowering the overall amount of taxes owed by an individual taxpayer or a business.

Brief update to the instructor: I feel that I am doing fairly well so far in this term. I have learned several new concepts and have acquired theoretical clarity with regards to these concepts. These new concepts have widened my knowledge base of finance and have opened my mind with regards to the subject of finance as such.