Question

Adonis Corporation issued 10-year, 7% bonds with a par value of $280,000 Interest is paid semiannually. The market rate on the issue date was 6%. Adonis received $300,836 in cesh proceeds. Which of the following statements is true?

A. Adidas must pay $280,000 at maturity and no interest payments.
B. Adidas must pay $280,000 at maturity plus 20 interest payments of $8,400 each
C. Adidas must pay $280,000 at maturity plus 20 Interest payments of $9,800 each.
D. Adidas must pay $300,836 at maturity and no interest payments.
E. Adidas must pay $300,836 at maturity plus 20 interest payments of $9,800 each.

Answer 1

Adonis Corporation must pay $280,000 at maturity plus 20 semiannual interest payments of $9,800 each.

Step-by-step explanation:

Adonis must pay $280,000 at maturity plus 20 interest payments of $9,800 each. This outcome reflects the nature of the bond being an interest-bearing instrument with a higher market price than its par value.

When a corporation issues bonds, they agree to pay back the par value ($280,000 in this case) at maturity and make regular interest payments throughout the life of the bond. The 7% coupon rate on a $280,000 bond results in an annual interest payment of $19,600, which is halved to $9,800 for each semiannual payment. Over 10 years, there will be 20 such payments.

Even though the bond was sold at a premium (for more than the par value), this does not affect the par value or the interest payments—it merely reflects the lower market rate of interest compared to the coupon rate when the bond was issued. The company does not have to repay the premium amount at maturity; only the par value is repaid.