Question
suppose you purchase a $2000 bond with a 5% coupon. what is the periodic interest rate of this bond?
A. 5%
B. 3.75%
C. 1.25%
D. 2.5%
A. 5%
B. 3.75%
C. 1.25%
D. 2.5%
Answers
GPT-4o mini
The periodic interest rate of a bond is determined by the coupon rate and the frequency of interest payments. Since the bond has a 5% annual coupon rate, this means it pays 5% of its face value (which is $2000) annually.
To calculate the periodic interest, we first determine the annual interest payment:
\[
\text{Annual Interest Payment} = \text{Coupon Rate} \times \text{Face Value} = 0.05 \times 2000 = 100
\]
Now, we'll look at the options provided. If the bond pays interest annually, the periodic interest rate is simply the annual coupon rate:
- **Annual Coupon Rate**: 5%
However, if the bond paid interest semiannually, we would divide the annual rate by 2. But based on the information given and the most common scenario for coupon bonds, we'll assume the interest is paid annually.
Thus, the periodic interest rate of this bond is:
**A. 5%**
To calculate the periodic interest, we first determine the annual interest payment:
\[
\text{Annual Interest Payment} = \text{Coupon Rate} \times \text{Face Value} = 0.05 \times 2000 = 100
\]
Now, we'll look at the options provided. If the bond pays interest annually, the periodic interest rate is simply the annual coupon rate:
- **Annual Coupon Rate**: 5%
However, if the bond paid interest semiannually, we would divide the annual rate by 2. But based on the information given and the most common scenario for coupon bonds, we'll assume the interest is paid annually.
Thus, the periodic interest rate of this bond is:
**A. 5%**