Determine the interest payment for the following three bonds. (Assume a $1,000 par value.) (Round your answers to 2 decimal places.) 4 ½ percent coupon corporate bond (paid semiannually) 5.15 percent coupon Treasury note Corporate zero-coupon bond maturing in 15 years
Determine the interest payment for the following three bonds. (Assume a $1,000 par value.) (Round your answers to 2 decimal places.) 4 ½ percent coupon corporate bond (paid semiannually) 5.15 percent coupon Treasury note Corporate zero-coupon bond maturing in 15 years
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Bond Interest Payment Calculation
In this section, you will learn to determine the interest payment for various types of bonds. We will use a par value of $1,000 and round our results to two decimal places.
#### Types of Bonds and Their Interest Payments:
1. **4 ½ Percent Coupon Corporate Bond (Paid Semiannually)**
- **Interest Payment Calculation:**
- Annual interest rate: 4.5%
- Par value: $1,000
- Since it is paid semiannually, divide the annual rate by 2.
- \( \text{Semiannual Interest Payment} = \frac{4.5\% \times \$1,000}{2} \)
2. **5.15 Percent Coupon Treasury Note**
- **Interest Payment Calculation:**
- Annual interest rate: 5.15%
- Par value: $1,000
- Treasury notes typically pay interest semiannually.
- \( \text{Semiannual Interest Payment} = \frac{5.15\% \times \$1,000}{2} \)
3. **Corporate Zero-Coupon Bond Maturing in 15 Years**
- **Interest Payment Calculation:**
- Zero-coupon bonds do not pay periodic interest.
- They are sold at a discount and mature at par value.
- **Annual Interest Equivalent** can be derived for comparison but typically not relevant for a standard periodic interest calculation.
Let's calculate each of these:
1. **4 ½ Percent Coupon Corporate Bond (Paid Semiannually)**
- Semiannual interest = \( \frac{4.5 \% \times \$1,000}{2} = \$22.50 \)
2. **5.15 Percent Coupon Treasury Note**
- Semiannual interest = \( \frac{5.15 \% \times \$1,000}{2} = \$25.75 \)
3. **Corporate Zero-Coupon Bond Maturing in 15 Years**
- No periodic interest payment; it is sold at a discount.
These interest amounts are calculated based on the given par value and annual coupon rate assuming semiannual payments where applicable. Zero-coupon bonds do not provide periodic interest payments but instead compensate by offering a return at maturity when the bond is redeemed at par value.
By understanding these calculations, you can better comprehend the benefits and cost differences among various bond types.
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