Question

Adonis Corporation issued 10-year, 7% bonds with a par value of $220,000. Interest is paid semiannually. The market rate on the issue date was 6%. Adonis received $236,371 in cash proceeds. Which of the following statements is true?

a. Adidas must pay $220,000 at maturity plus 20 interest payments of $6,600 each.
b. Adidas must pay $236,371 at maturity and no interest payments.
c. Adidas must pay $220,000 at maturity plus 20 interest payments of $7,700 each.
d. Adidas must pay $220,000 at maturity and no interest payments.
e. Adidas must pay $236,371 at maturity plus 20 interest payments of $7,700 each.

Answer 1

The answer is C

Step-by-step explanation:

The interest payment is semiannual, meaning it pays interest twice in a year.

Adonis corporation issued a 10-year bond. Since the interest payment is paid twice a year, the number of periods the interest will paid is 20 times(10 years x 2).

And interest to paid is:

$220,000 x 7%

Annual interest paid is $15,400

Since it is semiannual, interest payment will be $7,700($15,400 ÷ 2)

The principal payment at maturity is $220,000. Par value means face value at maturity or principal value at maturity.