Kalahari Limited
On January 2, 2019, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
-Refer to Kalahari Limited. The semiannual cash payment on the bonds is

Question

Quizplus · Accepted Answer

The face value of the bonds is not explicitly given in the question, but we can infer it from the information provided. The bonds were issued for $1,150,000, which is more than the typical face value for bonds, indicating that they were issued at a premium (since the market rate of 8% is lower than the stated rate of 10%).
However, the face value is typically the amount that will be paid back at maturity, and the interest payments are based on this face value, not on the amount for which the bonds were issued. Since the question does not provide the face value, we will assume the standard face value for corporate bonds, which is often $1,000 per bond.
Given that there are 1,000,000 bonds, the total face value of the bonds would be:
1,000,000 bonds * $1,000/bond = $1,000,000,000
Now, we calculate the semiannual interest payment using the stated rate of 10%:
Annual interest payment = Face value * Stated interest rate
Annual interest payment = $1,000,000,000 * 10% = $100,000,000
Since interest is paid semiannually, we divide the annual interest by 2:
Semiannual interest payment = Annual interest payment / 2
Semiannual interest payment = $100,000,000 / 2 = $50,000,000
However, the numbers used here are unrealistic for a single company's bond issuance, as a face value of $1,000,000,000 with a 10% interest rate would result in an enormous interest payment of $50,000,000 semiannually.
It seems there might be a mistake in the interpretation of the bond quantity or face value. If we consider a more realistic scenario where the total face value is $1,000,000 (1,000 bonds at $1,000 each), the calculation would be:
Annual interest payment = $1,000,000 * 10% = $100,000
Semiannual interest payment = $100,000 / 2 = $50,000
Therefore, the correct semiannual cash payment on the bonds is $50,000, which corresponds to option (a).

Kalahari Limited On January 2, 2019, This Company Issued 1,000,000, 10-Year Bonds