Period 3 39 40 $23.0 $23.0 $23.0 $23.0 $23.0 + $2,000 A corporation issues a bond that generates the above cash flows. If the periods shown are 3 months, which of the following best describes that bond? O A. a 10-year bond with a notional value of $2,000 and a coupon rate of 4.6% paid quarterly. O B. a 13-year bond with a notional value of $2,000 and a coupon rate of 2.300% paid monthly. OC. a 40-year bond with a notional value of $2,000 and a coupon rate of 4.6% paid semiannually. O D. a 10-year bond with a notional value of $2,000 and a coupon rate of 1.150% paid annually.
Period 3 39 40 $23.0 $23.0 $23.0 $23.0 $23.0 + $2,000 A corporation issues a bond that generates the above cash flows. If the periods shown are 3 months, which of the following best describes that bond? O A. a 10-year bond with a notional value of $2,000 and a coupon rate of 4.6% paid quarterly. O B. a 13-year bond with a notional value of $2,000 and a coupon rate of 2.300% paid monthly. OC. a 40-year bond with a notional value of $2,000 and a coupon rate of 4.6% paid semiannually. O D. a 10-year bond with a notional value of $2,000 and a coupon rate of 1.150% paid annually.
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:### Understanding Bond Cash Flows
Bonds are debt securities issued by corporations or governments to raise capital. Bondholders receive periodic interest payments, known as coupon payments, and the return of the bond's face value (principal) at maturity. Examining cash flows helps in understanding the bond's structure, interest payments, and maturity.
### Bond Cash Flow Diagram
The diagram below illustrates a corporation issuing a bond that generates the following cash flows over time. Here each period represents 3 months:
```
Period | 0 | 1 | 2 | 3 | ... | 39 | 40 |
Cash Flow | 0 | $23.0 | $23.0 | $23.0 | ... | $23.0 | $23.0 + $2,000 |
```
- **Period 0:** Initial moment (no cash flow).
- **Periods 1 to 40:** Regular cash flows of $23.0 every 3 months.
- **Period 40:** Final cash flow of $23.0 plus the principal amount of $2,000 at maturity.
### Question
A corporation issues a bond that generates the above cash flows. If the periods shown are 3 months, which of the following best describes that bond?
#### Options:
A. A 10-year bond with a notional value of $2,000 and a coupon rate of 4.6% paid quarterly.
B. A 13-year bond with a notional value of $2,000 and a coupon rate of 2.300% paid monthly.
C. A 40-year bond with a notional value of $2,000 and a coupon rate of 4.6% paid semiannually.
D. A 10-year bond with a notional value of $2,000 and a coupon rate of 1.150% paid annually.
### Correct Answer Analysis
To determine the correct option, let's analyze the given periodic cash flow and match it with the bond terms:
1. Determine the total number of periods. Since each period is 3 months:
\(40 \text{ periods} \times 3 \text{ months} = 120 \text{ months} = 10 \text{ years}\).
2. Calculate the coupon rate based on the quarterly payments:
- Total annual coupon payment: \($23.0 \times 4 = $92.0\).
-
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