Question

Adonis Corporation issued 10-year, 11% bonds with a par value of $270,000. Interest is paid semiannually. The market rate on the issue date was 10%. Adonis received $286,827 in cash proceeds. Which of the following statements is true?
a) Adonis must pay $286,827 at maturity and no interest payments.
b) Adonis must pay $270,000 at maturity and no interest payments.
c) Adonis must pay $270,000 at maturity plus 20 interest payments of $13,500 each.
d) Adonis must pay $286,827 at maturity plus 20 interest payments of $14,850 each.
e) Adonis must pay $270,000 at maturity plus 20 interest payments of $14,850 each.

Answer 1

Answer:

e) Adonis must pay $270,000 at maturity plus 20 interest payments of $14,850 each.

Explanation:

Based on this information,Adonis Corporation is issuing a coupon paying bond.

• The $286,827 that they receive is the market price/ market value of the bond.

• The duration of the bond = 10 years, however, since the coupons are paid semiannually, there will be 10*2 = 20 payments in total.

• Semi annual coupon payment; PMT = (11%/2) *270,000 = $14,850
• The $270,000 is the face value of the bond which must be repaid at the end of the life of this bond.
• Therefore, Adonis must pay $270,000 at maturity plus 20 interest payments of $14,850 each.