Question 2 (4 marks) A company has the following bond issue: Bond A Series consists of 20,000 bonds with a face value of $1,000 each maturing in five years. The bonds have a coupon rate of 9%, payable semi-annually. Similar bonds in the market with similar risk currently have a yield of 6%, also based on semi-annual compounding.

Required:

Briefly explain what the following terms mean and provide an example of each rate from the Bond A Series issue:

a) Stated interest rate

b) Effective annual rate of interest (show calculations of this rate using both the coupon and yield rates)

c) Market yield