Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 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., $10,000 in this case. The annual payment is $400, which is the principal times the annual interest rate (or $400/$10,000 = 0.04, or 4 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