Question

12.

A corporate bond offers 9% coupon rate, compounded semi-annually. The maturity left is 7 years. The yield to maturity for bonds with such risks is 10%.

Which one of the following statements is correct?

		each coupon payment paid out is $50 per share
		10% is the interest rate you use as discount rate to find bond value
		each coupon payment paid out is $45 per share
		number of total coupon payments till maturity is 7

multiple choice. only 1 right

Answer 1

Coupon payment is computed as follows:

= 9% / 2 x $ 1,000 (Since the interest is compounded semi annually, hence divided by 2)

= $ 45

Interest rate is computed as shown below:

= 10% / 2 (Since the interest is compounded semi annually, hence divided by 2)

= 5%

number of total coupon payment is computed as follows:

= 7 x 2 (Since the interest is compounded semi annually, hence multiplied by 2)

= 14

So, the correct answer is option of each coupon payment paid out is $45 per share.

The statement of each coupon payment paid out is $50 per share is incorrect since each coupon payment is worth of $ 45

The statement of 10% is the interest rate you use as discount rate to find bond value is incorrect since 5% is the interest rate that we will use as discount rate to find bond value.

The statement of number of total coupon payments till maturity is 7 is incorrect since the number of total coupon payments till maturity is 14.

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