A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25. How frequently are coupon payments made in this case?
A) monthly
B) quarterly
C) semiannually
D) annually

Question

Quizplus · Accepted Answer

To find out the frequency of coupon payments, we need to use the coupon rate and coupon payments formula:

Coupon rate = (Annual coupon payment / Face value) x 100%

4.41% = (x / $5000) x 100%
x = $5000 x 4.41% = $220.50 (Annual coupon payment)

Now we can calculate the frequency of coupon payments:

- Quarterly: $220.50 / 4 = $55.125 (This is bigger than the coupon payment of $110.25 so quarterly is not possible)
- Semiannually: $220.50 / 2 = $110.25 (Matches the coupon payments, so semiannually is the correct answer)
- Annually: $220.50 / 1 = $220.50 (This is bigger than the coupon payment of $110.25 so annually is not possible)
- Monthly: $220.50 / 12 = $18.375 (This is much smaller than the coupon payment of $110.25, so monthly is not possible)

Therefore, the best choice is C, semiannually.

A University Issues a Bond with a Face Value of $5000