A company issues 8%,20-year bonds with a par value of $400,000.The current market rate of interest is 9%.The amount of interest owed to the bondholders for each semiannual interest payment is:

Question

Quizplus · Accepted Answer

The first step is to calculate the semiannual coupon payment. This can be done using the following formula:

Coupon Payment = Par Value x Coupon Rate / 2

Coupon Payment = $400,000 x 8% / 2 = $16,000

Next, we need to calculate the present value of the bond. This can be done using the present value formula for a bond:

PV = (Coupon Payment / (1 + r)^n) x (1 - 1 / (1 + r)^n) + (Par Value / (1 + r)^n)

Where:
r = Market Interest Rate / 2
n = Number of Semiannual Periods (20 years x 2 = 40)

PV = ($16,000 / (1 + 0.09/2)^40) x (1 - 1 / (1 + 0.09/2)^40) + ($400,000 / (1 + 0.09/2)^40) = $262,822.48

Finally, we can calculate the semiannual interest expense by multiplying the bond's carrying value (PV) by the market interest rate (r):

Semiannual Interest Expense = PV x r

Semiannual Interest Expense = $262,822.48 x 0.09 / 2 = $11,828.01

Therefore, the correct answer is D) $16,000.

A Company Issues 8%,20-Year Bonds with a Par Value of $400,000.The