Question

A company issues 9%, 7-year bonds with a par value of $260,000 on January 1 at a price of $273,732, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is: Multiple Choice $23,400. $20,800. $11,700. $10,400. $0.

Answer 1

$11,700

Step-by-step explanation:

The amount of each semi-annual payment is ascertained by multiplying the coupon rate of 9% with face value of the bond which is $260,000 while adjusting the interest payment to reflect a six month interest payment by multiplying by six months and dividing by 12 months as set out below:

Semi-annual interest payment=$260,000*9%*6/12

=$260,000*0.09*0.5=$11,700

The company would have to pay the bondholders the sum of $11,700 every six months throughout the duration of the bond

Answer 2

Semi-annual interest =$11,700

Step-by-step explanation:

The semi annual interest = coupon rate × nominal value× 1/2

= 9% × 260,000× 1/2

=$11,700

The interest has to be pro rated into two to account for 6 months