Chapter 6, Problem 1P

A 30-year bond with a face value of $1000 has a coupon rate of 5.5%, with semiannual payments.

1. a. What is the coupon payment for this bond?
2. b. Draw the cash flows for the bond on a timeline.

Summary Introduction

a.

To determine: The coupon payment on a bond.

Introduction:

Yield to maturity (YTM) is the rate of return projected for a security or a bond, which is apprehended until its maturity period. It is also considered as the internal rate of return (IRR) for a security or bond and it likens the current estimation of bond’s future cash flow to its present market cost. Coupon rate is expressed as an interest rate on a fixed income security like a bond. It is also called as the interest rate that the bondholders receive from their investment. It depends on the yield as of the day when the bond is issued.

Answer to Problem 1P

The Coupon Payment on a Bond is $27.50.

Explanation of Solution

Determine the coupon payment on a bond

The bond is paid on semi-annual basis.

$\begin{array}{c}CouponPayment=\left[\frac{\left(FaceValue\times CouponRate\right)}{2}\right]\\ =\left[\frac{\left(\$1,000\times 5.50\%\right)}{2}\right]\\ =\left[\frac{\$55}{2}\right]\\ =\$27.50\end{array}$

Therefore, the coupon payment on a bond is $27.50.

Summary Introduction

To determine: The cash flows of the bond on a timeline.

Explanation of Solution

Cash Flow Timeline: