When determining the amount of interest to be paid on a bond, which of the following information is necessary?

Question

Quizplus · Accepted Answer

When determining the amount of interest to be paid on a bond, the most essential piece of information needed is:
c. the stated rate of interest on the bonds
The stated rate of interest, also known as the coupon rate, is the rate of interest that the bond issuer has agreed to pay the bondholder. This rate is applied to the face value (also known as the par value) of the bond to calculate the periodic interest payments. For example, if a bond has a face value of $1,000 and a stated interest rate of 5%, the annual interest payment would be $50 (5% of $1,000).
The other options provided are not directly used to calculate the interest payment:
a. The value of the bonds in one year is not necessary for calculating the current interest payment.
b. The selling price of the bonds is relevant for the investor's yield if they purchase the bond at a discount or premium, but it does not affect the actual interest payment, which is based on the face value and the stated interest rate.
d. The effective rate of interest on the bonds, also known as the yield to maturity, is important for investors to understand the true return on the bond investment when considering the purchase price, the time to maturity, and the payment schedule. However, it does not determine the actual interest payment amount, which is based on the stated rate of interest.

When Determining the Amount of Interest to Be Paid on a Bond