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Difficulty: EasyDebt Securities and Bond Structure

An investor purchases a corporate bond with a par value of $1,000 and a stated annual coupon rate of 5.50%. If the bond makes interest payments semi-annually, what is the dollar amount of a single semi-annual interest payment?

Answer: 27.5 $

Answer

The single semi-annual interest payment is $27.50.
A 5.50% coupon on a 1,000parvaluebondpays1,000 par value bond pays 55.00 annually (1,000×0.055).Becausecorporatebondcouponspaysemi−annually,theinvestorreceiveshalfoftheannualamountperpayment,whichequals1,000 × 0.055). Because corporate bond coupons pay semi-annually, the investor receives half of the annual amount per payment, which equals 27.50.

Step-by-Step Solution

1
Calculate annual coupon payment amount
$55.00
Annual Interest = Par Value × Annual Coupon Rate = 1,000×0.055=1,000 × 0.055 = 55.00.
2
Calculate semi-annual payment amount
$27.50
Corporate bonds pay interest semi-annually (twice per year). Divide annual interest by 2: 55.00/2=55.00 / 2 = 27.50.

Key Concept

Calculating semi-annual coupon payments based on par value and coupon rate
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Topics

Debt Securities and Bond Structure

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