Fly by Night Corp. sells $600,000 of bonds to investors. The bonds have a 7% annual...

Fly by Night Corp. sells $600,000 of bonds to investors. The bonds have a 7% annual coupon rate and seminannuall coupon payments. The bonds were sold to yield 10%. What seminannual payment does Fly by Night make to the investors?

Expert Solution

While determining a bond's true value, two factors always come in picture; Coupon rate and Yield rate. Coupon rate of a bond refers to the rate of interest that a bond issuer agrees to pay to investors at a predefined periodic interval, whereas Yield of a bond refers to the overall return of bond that investors earn. One very important thing to note regarding a bond is that Coupon rate of a bond is predefined and generally remains fixed and this rate is used to calculate the periodic payments to bond holders. On the other hand, Yield of a bond keeps fluctuating and depends upon multiple things, however prevailing interest rates in market is the biggest driver of Yield rate.

As stated above, the semiannual coupon payments for the bond issued by Fly by Night Corp will be calculated using coupon rate solely.

Formula: Semiannual Coupon Payments = (Annual Coupon Rate / 2) * Face Value of Bonds
Semiannual Coupon Payments = (7%/2) * $600,000
=> 3.5% * $600,00 = $21,000

So, Fly by Night Corp pays $21,000 semiannually to its investors.

jeff jeffy answered 1 year ago

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