Question

An investor pays $900 for a bond with a principal value of $1,000 and a coupon rate of 8%. How much in annual interest will the investor receive on this investment?

Answer 1

Annual Interest = $80

Interest rate = 8.89%

Step-by-step explanation:

The investor pays discounted price for this bond.

We know, Annual Interest = Coupon payment/Market value

Given,

Coupon payment = Principal value*Coupon rate

Coupon payment = $1,000*8% = $80

Market value = Price pays for the bond = $900

Therefore, the annual interest rate = $80/$900

Annual Interest rate = 8.89%

Note that, coupon payment is the annual interest rate.