A company issues 9%,5-year bonds with a par value of $100,000 on January 1 at a price of $104,055,when the market rate of interest was 8%.The bonds pay interest semiannually.The amount of each semiannual interest payment is:
A)$9,000.
B)$8,000.
C)$4,000.
D)$4,500.
E)$0.

Question

Quizplus · Accepted Answer

To find the semiannual interest payment, we need to first find the annual interest payment.
Annual interest payment = par value x annual coupon rate = $100,000 x 9% = $9,000
Next, we need to find the present value of the bond's future cash flows, which includes the 10 semiannual interest payments and the $100,000 principal payment at maturity. We can use the given market rate of 8% to discount the cash flows.
PV = ($9,000 / 0.04) x (1 - 1 / (1.04)^10) + ($100,000 / (1.04)^10) = $104,055
Therefore, the semiannual interest payment is:
Semiannual interest payment = $9,000 / 2 = $4,500 (since interest is paid semiannually)
The correct choice is D.

A Company Issues 9%,5-Year Bonds with a Par Value of $100,000