Question

Pinto Corp. sells $300,000 of bonds to private investors. The bonds have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 5%. What periodic interest payment does Pinto make to its investors? A. $6,000 B. $5,000 C. $2,500 D. $3,000 E. None of the above

Answer 1

Answer:

The periodic interest payment is $6000. So, option A is the correct answer.

Explanation:

The coupon rate that is quoted on the bonds is always the rate for the whole year. Thus, a 4% coupon rate means a rate of interest of 4% for the whole year. The bonds are semi annual bonds which means the interest of 4% for the whole year is paid in two stages, after every 6 months.

The semiannual rate of interest is thus = 4% / 2 =  2%

The coupon is paid on the face value of the bond. The interest payment every six month or the periodic interest payment is,

Interest payment-periodic = 300000 * 0.02 = 6000