debt securities promise

Expert Solution

Debt securities promise:

1. To repay the amount invested (Principal )at the end of a specified period(Maturity )

2. To pay periodic sums at specified periods at a specified rate(interest rate)

or pay the total sum (interest )at the end of of the specified period(Maturity)

For example:

If the specified annual interest rate is 10%, the maturity specified is 5 years and the periodic payment is specified as six monthly:

And the invested amount is $1,000.

Then the debt security promises to pay:

a. $ 1,000 back bat the end of 5 years from the date of investment

b.(1000*10%)/2=$50 at the end of every six months till maturity

But if it specifies that there will be no periodic payment (zero Coupon) and the specified annual interest rate is 10%

Then ,

The debt security promises to pay:

a. $ 1,000 back bat the end of 5 years from the date of investment

b.(1000*(1.1^5)=$1610.51 at the end of 5 years ( maturity)

jeff jeffy answered 1 year ago

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