Question

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is __________, the coupon rate is __________, and the term of this bond is __________.

Answer 1

The correct answer is $10,000, 4% and 4th year.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Initial purchase = $10,000

At the end of 1st, 2nd and 3rd year = $400

At the end of 4th year = $10,400

(1). The principal amount of this bond is $10,000.

As Initial purchase of bond = Principal amount of bond.

(2). The coupon rate is 4%.

As, at the end of 4th year it pays = $10,400

Here, Principal amount = $10,000 and coupon value = $400

So, Coupon rate = $400 ÷ $10,000 = 4%

(3). The term of this bond is 4 years.

As the principal amount is repaid fully at the end of 4th year.