Question

eric bought a $500 bond with a 6.3% coupon that matures in 20 years. what are eric's total earnings for this bond when it reaches its maturity date?

A. $945.00
B. $315.00
C. $1260.00
D. $630.00

Answer 1

To calculate Eric's total earnings from the bond when it matures, we need to consider both the interest he earns over the years and the face value of the bond. Here's how we can break it down:

1. **Bond face value (Principal)**: $500
2. **Coupon rate**: 6.3%
3. **Maturity period**: 20 years

First, let's calculate the annual interest payment:

\[
\text{Annual interest} = \text{Face value} \times \text{Coupon rate} = 500 \times 0.063 = 31.50
\]

Next, we can find the total interest earned over the 20 years:

\[
\text{Total interest} = \text{Annual interest} \times \text{Number of years} = 31.50 \times 20 = 630.00
\]

Now, to find Eric's total earnings at maturity, we add the total interest earned to the original investment (the principal):

\[
\text{Total earnings} = \text{Total interest} + \text{Principal} = 630.00 + 500 = 1130.00
\]

However, the question specifically asks for the earnings from the bond itself, not the total value at maturity.

Thus, the total earnings (interest earned) alone is:

\[
\text{Total earnings} = 630.00
\]

**Therefore, the answer is**: D. $630.00