A company pays 100 for a bond with annual coupons X to get an effective annual yield rate of 5%. The amount of interest in the 5th coupon is 4.85. Determine X.

Question

Laura Lamb

Business

5 June, 05:49

A company pays 100 for a bond with annual coupons X to get an effective annual yield rate of 5%. The amount of interest in the 5th coupon is 4.85. Determine X.

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Sherman · Answer 1

The value of X = 4.85.

Explanation:

This problem requires us to tell coupon payment of a bond. Market value and annual yield rate is given in the problem. We know that market value/fair value of bond is equal to all future cashflow, that bond will generate, discounted at effective rate. The bond redemption date is not given. However 5th coupon payment is mentioned in problem.

We know that coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond's yield. So as coupn payment remain same over the period so 4.85 is annual coupon payment.