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A bond purchased at a premium has a price greater than its face value.
A bond purchased at a premium has a price greater than its face value.
True
The semi-annual coupon amount for a bond with a face value of P300,000 and a coupon rate of 10% is P15,000.
The semi-annual coupon amount for a bond with a face value of P300,000 and a coupon rate of 10% is P15,000.
False
The term of a bond refers to the fixed period from the purchase date until the bondholder receives the coupon payments.
The term of a bond refers to the fixed period from the purchase date until the bondholder receives the coupon payments.
False
The market rate is what determines the coupon payments received by the bondholders.
The market rate is what determines the coupon payments received by the bondholders.
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If the price of a bond is less than its face value, it is said to be purchased at a discount.
If the price of a bond is less than its face value, it is said to be purchased at a discount.
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For a bond with a coupon rate of 5% and a market rate of 4%, the fair price of the bond will likely be less than its face value.
For a bond with a coupon rate of 5% and a market rate of 4%, the fair price of the bond will likely be less than its face value.
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The fair price of a bond can be calculated using the formula P = F.(1+j)^n.
The fair price of a bond can be calculated using the formula P = F.(1+j)^n.
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A coupon rate of 10% indicates that the interest payments are made annually.
A coupon rate of 10% indicates that the interest payments are made annually.
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Study Notes
Bond Definitions
- Bond: An interest-bearing security promising a set amount on maturity and regular interest payments (coupons).
Coupon
- Coupon: Regular interest payments made to the bondholder between purchase and maturity dates. Usually paid semi-annually.
Coupon Rate
- Coupon Rate (r): The rate for each coupon payment period.
Price of a Bond
- Price of a Bond (P): The purchase price of a bond.
Par Value/Face Value
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Par Value or Face Value (F): The amount payable at maturity.
- If the bond price (P) equals the face value (F), the bond is bought at par.
- If P is less than F, the bond was purchased at a discount.
- If P is greater than F, the bond was purchased at a premium.
Term of a Bond
- Term of a Bond: The fixed period, measured in years, when a bond can be redeemed, as stated in the bond certificate. This is also the number of years from purchase to maturity.
Fair Price of a Bond
- Fair Price of a Bond: The present value of all cash inflows to the bondholder.
Example Calculation (Semi-annual Coupon)
- To determine a semi-annual coupon amount: Multiply the Face Value by 1/2.
- Example: A bond with a face value of P300,000 and a 10% coupon rate payable semi-annually has a semi-annual coupon amount of P15,000.
Formulas
- Semi-annual Coupon: (Face Value)(1/2)
- Annual Coupon: (Face Value)(r)
- Fair Price (First Step): P = F / (1 + j)n
- Fair Price (Second Step): (1 + r)1 = (1 + j)m
- Fair Price (Last/Final Step): P = R [1 − (1 + j)−n] / j
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Description
This quiz covers key concepts related to bonds, including definitions of bonds, coupon rates, and pricing mechanisms. Test your knowledge on the various terms and their importance in the bond market.
