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Question

Difficulty: MediumDebt Securities and Bond Structure

An investor purchases a corporate bond with a par value of 1,000tradinginthesecondarymarketataquotedpriceof92(1,000 trading in the secondary market at a quoted price of 92 ( 920). The bond pays a stated annual coupon rate of 7.5%, with interest payable semi-annually. What is the dollar amount of each semi-annual interest payment received by the bondholder?

Answer: 37.5 $

Answer

Each semi-annual coupon payment is $37.50.
The dollar amount of a bond's coupon payment is determined by multiplying its par value (1,000)bytheannualcouponrate(7.51,000) by the annual coupon rate (7.5%), giving an annual payment of 75.00. Because interest is paid semi-annually (twice per year), each individual payment is half of the annual amount, resulting in 37.50.Thecurrentmarketprice(37.50. The current market price ( 920) affects yield calculations such as current yield or yield to maturity, but it does not change the fixed dollar interest paid by the issuer.

Step-by-Step Solution

1
Calculate annual coupon payment
1,000parvalue×7.51,000 par value × 7.5% coupon rate = 75.00 per year
Bond coupon payments are always calculated based on the bond's par value ($1,000), regardless of current market trading price.
2
Calculate semi-annual coupon payment
75.00/2=75.00 / 2 = 37.50 per payment period
Bonds typically pay interest semi-annually, requiring the annual payment to be divided equally into two payments.

Key Concept

Bond Coupon Payment Calculation
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Topics

Debt Securities and Bond Structure

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