Suppose the face value of a bond which matures in seven years is $5,000, and pays a coupon of $75. Suppose the bond was purchased at a price of $2,000, and the price is estimated to be constant the entire time until maturity. What will be the rate of return on the bond? 40% 4% .0375% 3.75%

Suppose the face value of a bond which matures in seven years is $5,000, and pays a coupon of $75. Suppose the bond was purchased at a price of $2,000, and the price is estimated to be constant the entire time until maturity. What will be the rate of return on the bond? 40% 4% .0375% 3.75%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 4MC

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Question

Suppose the face value of a bond which matures in seven years is $5,000, and pays a coupon of $75. Suppose the bond was purchased at a price of $2,000, and the price is estimated to be constant the entire time until maturity. What will be the rate of return on the bond?

40%

4%

.0375%

3.75%

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

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