A 5% debenture (face value = $1000) pays interest on June 30 and December 31. It is callable at a price of 105% together with accrued interest. Suppose the company decides to call the bonds on September 30. What price must it pay for each bond?
A) $1000.00
B) $1037.50
C) $1062.50
D) $1050.00

Question

Quizplus · Accepted Answer

The bonds are being called on September 30, which means the company needs to pay accrued interest from June 30 to September 30. Since there are 3 months between June 30 and September 30, the accrued interest is 5%/2 * 1000 * 3/12 = $12.50. The call price is 105% of face value plus accrued interest, so the price the company must pay for each bond is 105% * 1000 + $12.50 = $1062.50. Therefore, the correct answer is C.

A 5% Debenture (Face Value = $1000) Pays Interest on June