On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.How much cash will bondholders receive on December 31,2011,the first interest payment date?

Question

Quizplus · Accepted Answer

To calculate the cash bondholders will receive on December 31, 2011, we need to first find the amount of interest they are owed for the year.

The bond's face value is $1,000,000 and its interest rate is 5%, so the annual interest payment is:

$1,000,000 x 0.05 = $50,000

However, since the market rate of interest is 6%, the bond is only worth $942,301 today (i.e., the present value of its future cash flows discounted at 6%).

Therefore, the cash bondholders will receive on December 31, 2011 is simply the annual interest payment of $50,000.

So, the answer is B) $50,000.

On January 1,2011,Alpha Company Issued $1,000,000 of 5%,20-Year Bonds to Buy