Question

Consider a bond paying a coupon rate of 10% per year, compounded annually. Assume that the market interest rate (YTM or return on investments of like risk) is 15% per year. In other words you want a 15% return on the bond.   The bond has three years until maturity. The par value is $1,000. Assume that you buy the bond today for $885.84.

20)   What is the interest payment that you will receive each year (yr 1, yr 2, and yr 3)?  

Please put your answer on the blank line on the answer sheet. Please record your answer in dollars and cents.

21)   What is the cash flow (interest only) that you want to receive each year (yr 1, yr 2, and yr 3) based on the 15% return?

Answer 1

20. Interest payment that we will receive each year will be as follows

Coupon Rate is the rate on which Company pays interest.

Coupon Amount i.e., Interest Amount is always calculatted on Par Value of Bond.

Interest = Par Value * Coupon Rate

Interest Yr 1 = $ 1000 * 10% = $100

Interest Yr 2 = $ 1000 * 10% = $100

Interest Yr 3 = $ 1000 * 10% = $100

21. Our expectation is to earn Interest at the Market Rate. So,

Interest Yr 1 = $1000 * 15% = $150

Interest Yr 2 = $1000 * 15% = $150

Interest Yr 3 = $1000 * 15% = $150