Question

The yield on your company's seven-year bonds is currently 4.22%, with a price in the market of $985.19. What can you say about the annual coupon payment?

(A) It is a little less than $42.
(B) It is more than $42.
(C) Nothing to be said about the annual coupon payment until the years to maturity are known.

Answer 1

The annual coupon payment for the company's bonds with a 4.22% yield and a market price of $985.19 is slightly less than $42, aligning with option (A).

Step-by-step explanation:

When discerning the annual coupon payment of a company's seven-year bonds with a yield of 4.22% and a market price of $985.19, we can infer that the coupon payment is slightly less than $42. This deduction comes from the interest yield—a reflection of interest payments plus capital gains—being a representation of the bond's return at current market conditions.

Given a $1,000 face value bond with an 8% interest or coupon rate when market interest rates rise, this bond will sell for less than face value to offer a competitive yield. Consequently, based on the bond's yield and its market price, we can estimate the coupon payment to be slightly less than $42, aligning with option (A).