Question

Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate. What is the frequency of bond interest payments?

1) Semiannually
2) Annually
3) Quarterly
4) Monthly

Answer 1

The frequency of bond interest payments is typically semiannual. This means bondholders receive interest twice a year, despite the interest rate being expressed on an annual basis. Bondholders have legal rights to these payments, but they may not recover the full amount in case of default. Option 1 is the correct answer.

Step-by-step explanation:

Frequency of Bond Interest Payments

When a company issues bonds, such as the $10 million bond issued at an annual interest rate of 8%, it is common practice to make interest payments on a semiannual basis, despite the interest rate being expressed annually.

Therefore, the frequency of bond interest payments is typically semiannual. Bondholders who invest in these bonds are entitled to receive the interest payments at the specified intervals until the bond's maturity. For example, if a company promises an annual interest of $800,000 on its $10 million borrowing, this would typically translate to $400,000 every six months.

It's important for firms to honor these payment schedules, as failure to do so may result in legal action from the bondholders, who could force the company to raise funds through asset sales. However, in the event of default, there is always the risk that bondholders may not recover the full amount they lent to the firm.