Question

Adonis Corporation issued 10-year, 11% bonds with a par value of $300,000. Interest is paid semiannually. The market rate on the issue date was 10%. Adonis received $318,696 in cash proceeds. Which of the following statements is true?

a. Adonis must pay $300,000 at maturity plus 20 interest payments of $16,500 each.
b. Adonis must pay $300,000 at maturity and no interest payments.
c. Adonis must pay $318,696 at maturity plus 20 interest payments of $16,500 each.
d. Adonis must pay $300,000 at maturity plus 20 interest payments of $15,000 each.
e. Adonis must pay $318,696 at maturity and no interest payments.

Answer 1

a. Adonis must pay $300,000 at maturity plus 20 interest payments of $16,500 each

Step-by-step explanation:

It should be noted that at maturity bond issuers usually pay back the face value of the bond to bondholders except where they also pay a premium of the face value which is not the case here, hence, the face value of $300,000 would be repaid at maturity.

There would 20 semiannual coupon payments in 10 years bond tenor and the value of each semiannual coupon is computed thus:

semiannual coupon=face value*coupon rate/2

coupon rate=11%(11% bonds means that coupon rate is 11%)

semiannual coupon=$300,000*11%/2

semiannual coupon=$16,500