Q1:What is the cash flow of a 8-year bond that pays coupon interest semiannually, has a coupon rate of 6%, and has a par value of $100,000?
Question
Q1: What is the cash flow of a 8-year bond that pays coupon interest semiannually, has a coupon rate of 6%, and has a par value of $100,000?
Solution
To calculate the cash flow of an 8-year bond that pays coupon interest semiannually, we need to determine the coupon payment and the total cash flow over the life of the bond.
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Coupon Payment Calculation:
- Par Value (Face Value) = $100,000
- Coupon Rate = 6%
- Since the bond pays interest semiannually, we divide the coupon rate by 2 and multiply the par value by this rate to find the semiannual coupon payment.
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Total Cash Flow Calculation:
- The bond has a total of 8 years, and since it pays interest semiannually, there will be a total of coupon payments.
- The total cash flow from the coupon payments over the life of the bond is:
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Final Cash Flow:
- At the end of the 8 years, the bond will also pay back the par value of $100,000. Therefore, the total cash flow from the bond will be the sum of the total coupon payments and the par value.
In summary, the total cash flow of the bond over its 8-year life is $148,000.
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