The interest rate stated on a bond, note or other fixed income security, expressed as the percentage of principle value is known as:
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A. B. C. D.B
The correct answer to the question is B. Coupon rate.
The coupon rate is the interest rate that is stated on a bond, note, or any other fixed income security. It represents the annual interest payment as a percentage of the bond's face value or principal amount. It is called the "coupon rate" because in the past, bondholders would receive physical coupons that they could present to the issuer to receive interest payments.
When an investor purchases a bond, they are essentially lending money to the issuer, such as a corporation or a government entity. The issuer agrees to pay interest to the bondholder at regular intervals, typically semi-annually or annually, based on the coupon rate and the face value of the bond.
For example, let's say you have a bond with a face value of $1,000 and a coupon rate of 5%. The issuer would pay you $50 (5% of $1,000) in interest annually. This interest payment remains fixed throughout the life of the bond, regardless of any changes in the prevailing interest rates in the market.
The coupon rate is predetermined and specified at the time of issuance. It is influenced by various factors, including the creditworthiness of the issuer, prevailing market interest rates, the maturity of the bond, and the supply and demand dynamics for the bond.
It's important to note that the coupon rate is different from the yield or the return an investor actually earns on the bond. The yield takes into account the price at which the bond was purchased, which may be higher or lower than its face value, as well as any changes in market interest rates. The yield reflects the total return an investor can expect to receive from the bond over its holding period.
In summary, the coupon rate is the fixed interest rate stated on a bond or other fixed income security, expressed as a percentage of the bond's face value. It represents the annual interest payment that the bondholder will receive from the issuer.