Question

A 10-year Treasury bond is issued with face value of $1,000, paying interest of $50 per year. If market yields increase shortly after the T-bond is issued, what is the bond’s coupon rate? (Enter your answer as a percent rounded to 1 decimal place.)

Answer 1

The coupon rate of the 10-year Treasury bond with a face value of $1,000 and an annual interest payment of $50 is 5.0%. This rate is fixed and does not change, even if market yields increase after the bond is issued.

Step-by-step explanation:

The coupon rate of a bond is the annual interest payment expressed as a percentage of the bond's face value. For the given 10-year Treasury bond with a face value of $1,000 and an annual interest payment of $50, the coupon rate can be calculated by dividing the annual interest payment by the face value of the bond.

The coupon rate calculation is as follows:

Coupon Rate = (Annual Interest Payment / Face Value) * 100%

Coupon Rate = ($50 / $1,000) * 100%

Coupon Rate = 5.0%

Despite the market yields increasing, the coupon rate does not change because it is fixed at the time the bond is issued. However, if the market interest rates rise, the bond's market price will likely decrease, as investors seek out newer issues with higher yields to compensate for the higher prevailing interest rates.