Question

Consider a 10-year bond with a face value of $1000 that has a coupon rate of 5.5%, with semiannual payments.

a.What is the coupon payment for this bond?Answer ____________________________

b.Draw the cash flows for the bond on a timeline. _______________________________

Answer 1

(a)

Semiannual Coupon Payment PMT = 5.5%*1000/2 = $27.5

(b)

20 Coupon Payments of $27.5 are made from Year 1 to Year 10

Par Value ($1000) is paid at the end of maturity period i.e at end of 20th period (10 years)

Hence, Payments from Period 1 - 19 = $27.5

Payment in Period 20 = 1000 + 27.5 = $1027.5