Question

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ___, the coupon rate is ____, and the term of this bond is _____.A. $400; 40%; four yearsB. $10,000; 4%; four yearsC. $10,000; $400; 4%D. $10,400; 4%; four years

Answer 1

Answer: Option(d) is correct.

Explanation:

Given that,

Purchases a bond = $10,000

Bond pays at the end of the first, second, and third years = $400

Bond pays upon its maturity at the end of four years = $10,400

(i) Principal amount of this bond = $10,000

It is the issue price of the bond.

(ii) The coupon rate of the bond = $\frac{Interest\ Received}{Face\ value\ of\ bond}\times100$

                                                     = $\frac{400}{10,000}\times100$

                                                     = 4% per year

(iii) The term of this bond is 4 years, as it was matured after 4 years.