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29 January, 14:18

An investor pays $900 for a bond with a principal value of $1,000 and a coupon rate of 8%. How much in annual interest will the investor receive on this investment?

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  1. 29 January, 16:17
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    Annual Interest = $80

    Interest rate = 8.89%

    Explanation:

    The investor pays discounted price for this bond.

    We know, Annual Interest = Coupon payment/Market value

    Given,

    Coupon payment = Principal value*Coupon rate

    Coupon payment = $1,000*8% = $80

    Market value = Price pays for the bond = $900

    Therefore, the annual interest rate = $80/$900

    Annual Interest rate = 8.89%

    Note that, coupon payment is the annual interest rate.
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