Question

On January 1, 2019, $40 million face amount of 5%, 20-year bonds were issued. The bonds pay interest on a semiannual basis on June 30 and December 31 each year. The market interest rates were slightly higher than 5% when the bonds were sold. How much interest will be paid semiannually (each year on June 30 and on December 31) on these bonds?

Answer 1

Answer:

$1 million or $1,000,000

Explanation:

The interest payment on the bonds is based on the face value of the bond and coupon interest rate of the bond. If interest is paid semiannually the coupon annual rate should also be calculated for 6 months to calculate the semiannual payment.

As per given data

Face value = $40 million

Coupon Rate = 5% annually

Coupon rate = 5% / 2 = 2.5% semiannually

Semiannual payment of interest = Face value x Coupon rate

Semiannual payment of interest = $40 million x 2.5%

Semiannual payment of interest = $1 million