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 years
B. $10,000; 4%; four years
C. $10,000; $400; 4% D. $10,400; 4%; four years

Answer 1

Answer: The correct answer is "B. $10,000; 4%; four years".

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 $10000, the coupon rate is 4%, and the term of this bond is four years.

Explanation: The maturity of the bond is at 4 years.

Its future value or face value is 10000.

The coupon rate is equal to $\frac{Cupon}{Face value}$ x 100

So Coupon rate = $\frac{400}{10000}$ x 100 = 4%