Which of the following are true for a coupon bond?
Coupon bonds are a popular type of fixed-income security that many investors prefer due to their predictable cash flows and relatively lower risk compared to other investments. Understanding the characteristics and features of coupon bonds is crucial for investors looking to diversify their portfolios and secure stable income. In this article, we will explore some of the key aspects of coupon bonds to help you determine which statements are true.
1. A coupon bond pays periodic interest payments to the bondholder.
This statement is true. Coupon bonds are designed to provide investors with regular interest payments, typically semi-annually or annually. These payments are calculated based on the bond’s coupon rate, which is expressed as a percentage of the bond’s face value. The coupon payments ensure a steady stream of income for the bondholder.
2. The face value of a coupon bond is the amount the bondholder will receive at maturity.
This statement is also true. The face value, also known as the par value or principal, is the amount that the bond issuer agrees to repay the bondholder at the bond’s maturity date. It is the initial amount invested by the bondholder and is typically a fixed sum, such as $1,000 or $10,000.
3. A coupon bond’s yield to maturity is the total return an investor can expect to receive if they hold the bond until maturity.
This statement is true. The yield to maturity (YTM) is a critical measure of a bond’s return, taking into account the bond’s current market price, its face value, the coupon payments, and the time remaining until maturity. It represents the annualized return an investor can expect to receive if they buy the bond at its current market price and hold it until maturity.
4. A coupon bond’s interest rate is fixed throughout its term.
This statement is true. Unlike variable-rate bonds, which have interest rates that can change over time, coupon bonds have a fixed interest rate that remains constant throughout the bond’s term. This fixed rate provides investors with predictable cash flows and makes coupon bonds a stable investment option.
5. A coupon bond’s market price can fluctuate due to changes in interest rates.
This statement is true. The market price of a coupon bond is influenced by changes in interest rates. When interest rates rise, the market price of existing coupon bonds typically falls, as new bonds with higher interest rates become more attractive to investors. Conversely, when interest rates fall, the market price of coupon bonds tends to rise.
In conclusion, all the statements provided are true for a coupon bond. Understanding these characteristics can help investors make informed decisions when considering adding coupon bonds to their investment portfolios.
