) A corporate bond makes payments of $9.67 every month for ten years with a fina
ID: 2773547 • Letter: #
Question
) A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond?
A) a 10-year bond with a face value of $2000 and a coupon rate of 4.8% with monthly payments
B) a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments
C) a 10-year bond with a face value of $2009.67 and a coupon rate of 4.8% with monthly payments
D) a 10-year bond with a face value of $2009.67 and a coupon rate of 5.8% with monthly payments
Explanation / Answer
Monthly payment on the bond = $9.67
Final Payment on the Bond = $2009.67
Final payment on the bond = Face Value of the bond + Coupon
Hence, 2009.67 = Face Value of the bond + 9.67
Face Value of the bond = 2009.67 - 9.67 = $2000
Hence, options C) & D) are eliminated.
With a coupon rate of 4.8% per annum with monthly payments,
Monthly coupon on the bond = (4.8% * 2000) / 12 = $8
With a coupon rate of 5.8% per annum with monthly payments,
Monthly coupon on the bond = (5.8% * 2000) / 12 = $9.67
Hence, option B) best describes the bond.
A corporate bond that makes payments of $9.67 every month for ten years with a final payment of $2009.67 is best described by a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments.
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