Use the information below to answer the following questions:
Assume that on 1 January 2012 the company issued $100 000 ten-year bonds with a 10% coupon rate paid semi-annually. The bond is issued to yield a 12% return to investors selling for $88 529.
-What is the interest expense for the first 6 months?

Question

Use the information below to answer the following questions:
Assume that on 1 January 2012 the company issued $100 000 ten-year bonds with a 10% coupon rate paid semi-annually. The bond is issued to yield a 12% return to investors selling for $88 529. 
-What is the interest expense for the first 6 months?

Quizplus · Accepted Answer

The annual interest on the bond is $10,000 ($100,000 x 10%). Since the bond pays interest semi-annually, the interest expense for the first 6 months would be 1/2 of the annual interest, or $5,000. Therefore, the correct answer is C ($5,312 is incorrect because it is the result of using the semi-annual discount rate of 6%, rather than the annual yield of 12%).

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