On July 1, 2016, $3.5 million face amount of 7%, 10-year bonds were issued. The bonds...
On July 1, 2016, $3.5 million face amount of 7%, 10-year bonds were issued. The bonds pay interest on an annual basis on June 30 each year. The market interest rates were slightly higher than 7% when the bonds were sold.
Required:
a. How much interest will be paid annually on these bonds?
Homework Answers
Annual interest to be paid = $245,000
Working
| Face value of Bond | $ 3,500,000 |
| Annual Interest rate | 7% |
| Annual interest to be paid (3500000 x 7%) | $ 245,000 |
Interest is paid on par value at stated rate.
The bonds in the above situation will be issued at discount since market rate of interest is higher than the coupon rate but even then the annual cash interest will remain the same.
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