Fred purchases a bond, newly issued by the Big Time Corporation, for $20,000. The bond pays $1,000 to its holder at the end of the first, second, and third years and pays $21,000 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 ________.

Question

Quizplus · Accepted Answer

The principal is the original amount borrowed, i.e., $20,000 in this case. The annual payment is $1,000, which is the principal times the annual interest rate (or $1,000/$20,000 = 0.05, or 5 percent). At maturity, which is after four years, the bondholder gets his/her money back plus the annual interest payment.

Fred Purchases a Bond, Newly Issued by the Big Time