Multiple Choice
Which one of the following is the price that an investor pays to purchase an outstanding bond?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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Given three bonds, each with a $1,000 par value, which of the following correctly calculates the annual interest payment for a bond with a 6% coupon rate?
A
$60
B
$6
C
$600
D
$1,000
Verified step by step guidance1
Understand the concept of a bond's coupon rate: The coupon rate is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond's par value.
Identify the given information: The bond has a par value of $1,000 and a coupon rate of 6%.
Recall the formula to calculate the annual interest payment: Annual Interest Payment = Par Value × Coupon Rate.
Substitute the given values into the formula: Par Value = $1,000 and Coupon Rate = 6% (or 0.06 in decimal form).
Perform the multiplication to determine the annual interest payment: Multiply $1,000 by 0.06 to find the annual interest payment.
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