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Difficulty: HardDebt Securities and Bond Structure

An institutional investor purchases 1515 corporate bonds at a secondary market quote of 94.2594.25. Each bond has a par value of $1,000\$1,000 and pays a fixed nominal coupon rate of 5.40%5.40\% semi-annually. What is the total annual coupon interest income, in dollars, that the investor will collect from this position?

Answer: 810 $

Answer

The investor will receive a total annual coupon interest income of 810810 dollars.
The correct calculation applies the nominal coupon rate (5.40%5.40\%) to the bond's par value ($1,000\$1,000) to determine that each bond pays $54.00\$54.00 per year. Multiplying $54.00\$54.00 by the 1515 bonds held yields total annual coupon income of $810.00\$810.00. Secondary market quotes (such as 94.2594.25) affect current yield and purchase price, but do not change the dollar coupon payment paid by the issuer.

Step-by-Step Solution

1
Calculate the annual interest paid per bond using the par value.
Annual Interest Per Bond=5.40%×$1,000=$54.00\text{Annual Interest Per Bond} = 5.40\% \times \$1,000 = \$54.00
Coupon rates are fixed percentages applied exclusively to the face (par) value of the bond, regardless of its prevailing secondary market trading price.
2
Calculate total annual interest for the full portfolio of 15 bonds.
Total Annual Interest=15×$54.00=$810.00\text{Total Annual Interest} = 15 \times \$54.00 = \$810.00
Multiplying the individual bond annual cash flow by the position size yields the total annual income collected.

Key Concept

Bond Coupon Payment Base and Income Calculation
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Topics

Debt Securities and Bond Structure

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