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Difficulty: HardDebt Securities and Bond Structure

An institutional investor purchases 25 corporate bonds at a secondary market price of 1,080perbond.Thebondscarrya1,080 per bond. The bonds carry a 1,000 par value and a stated annual coupon rate of 7.2%. What is the total dollar amount of interest income the investor receives every six months from this position?

Answer: 900 USD

Answer

The total semi-annual interest income received by the investor from the 25 corporate bonds is $900.
Coupon payments are calculated using the bond's par value (1,000)ratherthanitssecondarymarketprice(1,000) rather than its secondary market price ( 1,080). A 7.2% coupon rate on a 1,000parvalueproduces1,000 par value produces 72 in annual interest per bond. Because corporate bonds pay interest semi-annually, each bond pays 36everysixmonths(36 every six months ( 72 / 2). Multiplying 36by25bondsresultsinatotalsemi−annualpaymentof36 by 25 bonds results in a total semi-annual payment of 900.

Step-by-Step Solution

1
Calculate the annual interest payment per bond
$72 per bond
Bond coupon payments are contractual percentages calculated strictly against the par value ($1,000), regardless of the secondary market purchase price.
2
Determine the semi-annual interest payment per bond
$36 per bond
Standard corporate bonds pay interest semi-annually (twice per year), requiring the annual coupon amount to be divided by 2.
3
Calculate total semi-annual interest income for the entire position
$900 total
Multiplying the semi-annual payment per bond ($36) by the total number of bonds owned (25) yields the total semi-annual cash flow.

Key Concept

Calculation of semi-annual bond coupon payments based on par value
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Topics

Debt Securities and Bond Structure

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