Fundamentals of Business Intelligence (FBI) Practice Exam

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What describes the coupon rate on a bond?

The total interest paid over the bond's life
The stated rate on the face of the bond
The rate determined by market demand
The inflation-adjusted interest rate

The correct answer is: The stated rate on the face of the bond

The coupon rate on a bond refers specifically to the stated rate that is printed on the bond's face. This rate represents the periodic interest payments that the bondholder will receive from the issuer, typically expressed as a percentage of the bond's face value. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder would receive $50 annually in interest payments until maturity. This definition is foundational in understanding how bonds function in the financial market. The coupon rate is predetermined at issuance and remains fixed throughout the life of the bond, distinguishing it from other concepts such as the total interest paid (which would vary based on the bond's term and other factors) or rates influenced by market demand and inflation adjustments. Each of these factors affects the bond's yield and market price but does not change the bond's stated coupon rate.