Question

A company issues 8% bonds with a par value of $190,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:

Answer 1

$7,600

Explanation:

The computation of cash paid on July 1 to the bondholders is shown below:-

cash paid on July 1 to the bondholders = Par Value × Semi annual coupon rate

= $190,000 × 6 months ÷ 12 months × 8%

= $190,000 × 0.5 × 0.08

= $7,600

We considered the 6 months as semi-annually is mentioned in the question

Therefore for computing the cash paid on July 1 to the bondholders we simply applied the above formula.