Chapter 16, Problem 1RQ

Summary Introduction

To discuss: Meaning of bond and its par value, coupons payments and the way they are normally paid.

Explanation of Solution

Bonds constitute long term debt securities issued by government agencies and large corporations. The par value of the bond is its face value or face price, or the amount of money that will be returned to bond holders at the time of maturity.

Coupon payments are nothing but the interests paid on bonds based on the coupon rate, normally semi-annually.

Summary Introduction

To discuss: The effect, when investors buy a bond below the par value and decision of person X regarding the time of investing into bonds.

Explanation of Solution

If investors buys a bond below the par value and hold the bond till the date of maturity, they will earn the returns in addition to the coupon payments (Difference between par value and the amount paid).

Person X should consider to buy bonds rather than stocks when he receives periodic profit income payments, and also bonds have less risky investment than stock because of future cash flows (Known).

Therefore, the return on bonds is usually less than the expected return on stocks.