Multiple Choice
How do bonds generate income for investors?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
By the end of year 8, DeMarco and Tanya would have to pay a final payout of which of the following, assuming they invested in a bond with a face value of \$10,000, an annual coupon rate of 5%, and the bond matures at the end of year 8?
A
\$800 (the final year's interest payment)
B
\$0 (no payout required at maturity)
C
\$10,000 (the face value of the bond)
D
\$10,500 (face value plus one year's interest)
Verified step by step guidance1
Step 1: Understand the components of the bond. A bond typically has a face value (the principal amount), an annual coupon rate (interest paid annually), and a maturity period (the time after which the bondholder is repaid the face value).
Step 2: Calculate the annual interest payment using the formula: Interest Payment = Face Value × Annual Coupon Rate. In this case, the face value is \$10,000 and the annual coupon rate is 5%. Use MathML to represent this formula:
Step 3: Determine the total payout at maturity. At the end of year 8, the bondholder is entitled to receive the face value of the bond (\$10,000) plus any interest payments for the final year, if applicable.
Step 4: Analyze the options provided in the problem. Compare the calculated payout (face value + final year's interest payment) with the given choices: \$800, \$0, \$10,000, and \$10,500.
Step 5: Conclude that the correct payout at maturity includes the repayment of the face value of the bond (\$10,000) and potentially the final year's interest payment, depending on the terms of the bond agreement.
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