A company issues 8% bonds with a par value of $40,000 at par on January 1.The market rate on the date of issuance was 7%.The bonds pay interest semiannually on January 1 and July 1.The cash paid on July 1 to the bond holder(s)is:
A)$3,200.
B)$2,800.
C)$1,600.
D)$1,400.
E)$0.

Question

Quizplus · Accepted Answer

The cash paid on July 1 to the bondholders is the semiannual interest payment. Since the bonds have an 8% annual interest rate and a par value of $40,000, the annual interest is $40,000 * 8% = $3,200. For semiannual payments, this amount is divided by 2, resulting in $3,200 / 2 = $1,600.

A Company Issues 8% Bonds with a Par Value of $40,000