Question

We assume that the face value of a bond equals to _____. In order to find a coupon interest rate, one should _____ the coupon payment by the face value of the bond. Zero-coupon bonds _____ have coupon payments. If a company calls its bonds, it has to pay a call premium that equals one year's interest (hint: fact). If your coupon interest rate is 15%, your call premium is going to be _____.

A. $1,000; divide; do not; $75

B. $1,000; multiply; do not; $150

C. $1,100; divide; do not; $150

D. $1,000; divide; do not; $150

E. $1,000; multiply; do; $150

Answer 1

We assume the face value of the bond to be $1000

Coupon Interest Rate = Coupon Payment/Face value of bond

In order to find a coupon interest rate, one should divide the coupon payment by the face value of the bond.

Coupon payments = 0 for zero coupon bonds

Zero-coupon bonds do not have coupon payments.

If the bond is called earlier, the call premium is paid to the bond holder. Call Premium

If a company calls its bonds, it has to pay a call premium that equals one year's interest (hint: fact). If your coupon interest rate is 15%, your call premium is going to be $150.

Hence, option (D) is correct option