The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

Question

Quizplus · Accepted Answer

First, we need to find the semiannual coupon rate that will give the effective annual yield of 8.6285%. Using the formula for effective annual yield:

(1 + semiannual coupon rate)^2 - 1 = 0.086285

Solving for the semiannual coupon rate, we get:

semiannual coupon rate = (1 + 0.086285)^(1/2) - 1 = 0.041125 or 4.1125%

Each interest payment is based on the face value of $1,000 and the semiannual coupon rate of 4.1125%. Therefore, each interest payment is:

$1,000 x 4.1125% = $41.125 or $42.25 rounded to the nearest cent.

Therefore, the correct answer is B.

The Semiannual, 8-Year Bonds of Alto Music Are Selling at Par