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Which of the following statements about a bond's face value is true?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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Which of the following determines the dollar amount of interest paid to bondholders?
A
The bond's yield to maturity
B
The bond's stated (coupon) rate
C
The bond's maturity date
D
The bond's market price
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Understand the concept of a bond's stated (coupon) rate: The coupon rate is the annual interest rate set by the issuer of the bond at the time of issuance. It determines the fixed dollar amount of interest paid to bondholders periodically, typically semi-annually or annually.
Recognize that the bond's yield to maturity (YTM) is different: YTM represents the total return expected on a bond if held until maturity, factoring in the bond's market price, coupon payments, and time to maturity. It does not directly determine the dollar amount of interest paid.
Understand the bond's maturity date: The maturity date is the date on which the bond issuer repays the principal amount to the bondholder. While it is important for the bond's lifecycle, it does not affect the periodic interest payments.
Clarify the bond's market price: The market price is the current trading price of the bond in the market. It fluctuates based on market conditions and investor demand but does not influence the fixed dollar amount of interest paid to bondholders.
Conclude that the bond's stated (coupon) rate is the correct determinant of the dollar amount of interest paid to bondholders. The coupon rate is applied to the bond's face value to calculate the periodic interest payments.
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