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A 3% coupon rate bonds issued in Australia pays couponsA.$30 twice a yearB.$3 once a yearC.$1.5 twice a yearD.$6 in total per year

Question

A 3% coupon rate bonds issued in Australia pays coupons

  • A. $30 twice a year
  • B. $3 once a year
  • C. $1.5 twice a year
  • D. $6 in total per year
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Solution

The coupon rate of a bond is the annual interest rate the issuer will pay to the bondholder. It's expressed as a percentage of the bond's face value.

In this case, the bond has a coupon rate of 3%. This means that for every 100ofthebondsfacevalue,theissuerwillpay100 of the bond's face value, the issuer will pay 3 in interest per year.

Let's go through the options:

A. 30twiceayear:Thiswouldmeanthebondsfacevalueis30 twice a year: This would mean the bond's face value is 1000 (because 30is330 is 3% of 1000) and the issuer is paying interest semi-annually. This is possible if the bond's terms specify semi-annual payments.

B. 3onceayear:Thiswouldmeanthebondsfacevalueis3 once a year: This would mean the bond's face value is 100 (because 3is33 is 3% of 100) and the issuer is paying interest annually. This is possible if the bond's terms specify annual payments.

C. 1.5twiceayear:Thiswouldmeanthebondsfacevalueis1.5 twice a year: This would mean the bond's face value is 100 (because 1.52is31.5*2 is 3% of 100) and the issuer is paying interest semi-annually. This is possible if the bond's terms specify semi-annual payments.

D. 6intotalperyear:Thiswouldmeanthebondsfacevalueis6 in total per year: This would mean the bond's face value is 200 (because 6is36 is 3% of 200) and the issuer is paying interest annually. This is possible if the bond's terms specify annual payments.

So, all of the options could be correct depending on the face value of the bond and the frequency of the interest payments.

This problem has been solved

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