Question

Payments on bonds with a 10-year term are usually made as follows:

a. The par value (face value) of the bond plus all the interest on the bond is paid in a single payment at the end of the 10th year.
b. One-tenth of the par value of the bond is paid yearly and the interest for the entire 10-year bond term is paid in a single payment at the end of the 10th year
c. Interest is paid periodically throughout the bond term with the par value paid in a single payment at the end of the 10th year.
d. Equal periodic payments which include both interest and a reduction in par value of the bonds.

Answer 1

Option c is correct, where interest on bonds is paid periodically during the bond's term, and the par value is paid at the end of the 10th year. Bondholders receive interest payments and are entitled to repayment of the par value on maturity but may face risks if the issuer defaults.

Step-by-step explanation:

When addressing how payments on bonds with a 10-year term are usually made, option c is the most commonly employed method. According to this structure, interest is paid periodically throughout the bond term with the par value paid in a single payment at the end of the 10th year.

For instance, if a large company issues bonds for $10 million with a 10-year term, it promises to make annual interest payments at a rate of 8%, amounting to $800,000 each year. After the maturity period of 10 years, the company will repay the $10 million par value it originally borrowed. Should a company choose to borrow $50 million by issuing bonds, it might issue 10,000 bonds at $5,000 each, thus allowing investors to loan funds in smaller increments. Bondholders are those who own the bonds and receive these interest payments. In the event that the issuing company is unable to make the interest payments, bondholders have legal recourse but may still face risks, as recovery of the loaned amount may not be guaranteed if the company has insufficient assets.