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Difficulty: MediumDebt Securities and Bond Structure

An institutional investor holds 55 corporate bonds with a par value of $1,000\$1,000 each. The bonds carry a stated annual coupon rate of 6.8%6.8\% and pay interest semi-annually. What is the total dollar amount of interest the investor will receive in a single semi-annual payment?

Answer: 170 USD

Answer

The total dollar amount of interest received in a single semi-annual payment is $170.
A bond's coupon rate is expressed as an annual percentage of its $1,000\$1,000 par value. A 6.8%6.8\% annual coupon yields $68\$68 in total annual interest per bond. Because corporate bonds make semi-annual interest payments, each payment per bond is $34\$34 ($68/2\$68 / 2). For an investor holding 55 bonds, the total interest received per payment period is $34×5=$170\$34 \times 5 = \$170.

Step-by-Step Solution

1
Determine the annual dollar interest per bond.
1,000×0.068=1,000 \times 0.068 = 68 per bond per year.
The annual coupon rate determines the annual interest paid based on par value.
2
Determine the semi-annual dollar interest per bond.
68/2=68 / 2 = 34 per bond per payment period.
Standard corporate bonds pay interest twice a year (semi-annually).
3
Calculate the total semi-annual interest for the portfolio.
5 \times 34=34 = 170 total semi-annual interest.
Multiply the semi-annual interest per bond by the total number of bonds held.

Key Concept

Calculation of semi-annual coupon payments for debt securities
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Topics

Debt Securities and Bond Structure

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