A company issues 8% bonds with a par value of $40,000 at par on January 1. The market rate on the date of issuance was 7%. The bonds pay interest semiannually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:
A) $3,200.
B) $1,400.
C) $0.
D) $1,600.
E) $2,800.

Question

Quizplus · Accepted Answer

The bond pays an 8% annual interest rate, which is divided into two semiannual payments of 4% each. The par value of the bond is $40,000, so each semiannual interest payment is:

$40,000 × 4% = $1,600

Since the bonds were issued at par, the market rate of interest (7%) is the same as the coupon rate (8%), so the bond is priced at par on July 1. Therefore, there is no gain or loss to the bond holder, and the only cash flow is the semiannual interest payment of $1,600.

A Company Issues 8% Bonds with a Par Value of $40,000