Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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### 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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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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