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Briefly compare the coupon rate and the interest rate regarding bonds. What is a par value?...

Briefly compare the coupon rate and the interest rate regarding bonds. What is a par value? Describe the impact of a tax shield on fixed income yields.

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Answer #1

Coupon rate denotes the fixed payments expected over the life of bond.

Bond's effective interest rate is the rate that will discount the bond's future interest payments and its maturity value to the bond's current selling price

Par value is the face value of the bond.

Tax shield is a permissible deduction from taxable income

Explanation:

The Coupon rate refers to the fixed payments received over the life of bond. A coupon rate is always applied to the face value of the bond. It is decided by the issuer of the bond.

A Bond's effective interest rate is the rate that will discount the bond's future interest payments and its maturity value to the bond's current selling price . The effective interest rate is a bond investor's yield-to-maturity. It is also stated to as the market interest rate. The interest rates is decided by the lender.

Par value is the face value of the bond and it has no connection with the market value of the bond. Market value of the bond may be higher or lower compared to the face value.

Tax shield is a allowable deduction from taxable income for an individual or corporation. Tax shields lower the overall amount of taxes owed by an individual taxpayer or a business.It differs from country to country.

Calculating the tax shield can be simplified by using this formula:

  Tax Shield = Value of Tax Deductible Expense x Tax Rate

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