The Australian Treasury is issuing 10-year bonds that have a face value of $100 paying half-yearly coupons at 4% p.a. The bonds mature at par. Spencer purchases the bonds at the issue date that are priced at a yield to maturity of 5.2% p.a. Calculate the size of each coupon payment giving your answer correct to the nearest cent.
Question
The Australian Treasury is issuing 10-year bonds that have a face value of $100 paying half-yearly coupons at 4% p.a. The bonds mature at par. Spencer purchases the bonds at the issue date that are priced at a yield to maturity of 5.2% p.a. Calculate the size of each coupon payment giving your answer correct to the nearest cent.
Solution
The coupon rate is 4% per annum, but since it is paid semi-annually, we need to divide it by 2. So, the semi-annual coupon rate is 4%/2 = 2%.
The face value of the bond is $100.
To calculate the size of each coupon payment, we multiply the face value by the semi-annual coupon rate:
2
So, each coupon payment is $2.
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