A graphics design company issued bonds in the amount of $1,000,000 with a stated interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10 years, what would be the total amount of interest paid over the life of the bonds?
A)$1,000,000
B)$400,000
C)$800,000
D)$80,000

Question

Quizplus · Accepted Answer

To calculate the total amount of interest paid over the life of the bonds, we need to consider the following:
- Principal amount (face value of the bonds): $1,000,000
- Stated annual interest rate: 8%
- Frequency of interest payments: Semiannually (twice a year)
- Term of the bonds: 10 years
First, we calculate the semiannual interest payment:
Annual interest payment = Principal amount × Annual interest rate
Annual interest payment = $1,000,000 × 8% = $80,000
Since the interest is paid semiannually, we divide the annual interest payment by 2:
Semiannual interest payment = Annual interest payment / 2
Semiannual interest payment = $80,000 / 2 = $40,000
Next, we determine the total number of semiannual periods over the life of the bonds:
Total number of semiannual periods = Years × Number of periods per year
Total number of semiannual periods = 10 years × 2 = 20 periods
Finally, we calculate the total interest paid over the life of the bonds:
Total interest paid = Semiannual interest payment × Total number of semiannual periods
Total interest paid = $40,000 × 20 = $800,000
Therefore, the total amount of interest paid over the life of the bonds is $800,000.
The correct answer is c. $800,000.

A Graphics Design Company Issued Bonds in the Amount of $1,000,000