The Amazing Widget Company issues $500,000 of 6%, 10-year bonds at 103 on March 31, 2013. The bond pays interest on March 31 and September 30. On September 30, 2013, how much cash did the company pay out to bondholders?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of interest that has accrued from March 31 to September 30. The bond has a face value of $500,000 and a coupon rate of 6%, which means it pays $30,000 in annual interest ($500,000 * 0.06). Since interest is paid semi-annually, each payment is for $15,000 ($30,000 / 2).

The bonds were issued at 103, which means they were sold for 103% of face value or $515,000 ($500,000 * 1.03). However, only the face value of the bond ($500,000) is used to calculate interest payments.

Therefore, on September 30, the Amazing Widget Company paid out $15,000 in cash to bondholders. The correct answer is choice C.

The Amazing Widget Company Issues $500,000 of 6%, 10-Year Bonds