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Difficulty: Very hardDebt Securities and Bond Structure

An investor purchases five corporate bonds in the secondary market, each having a $1,000 par value and a stated annual coupon rate of 4.50%. The bonds pay interest semi-annually. What is the total dollar amount of interest income the investor will receive every six months from these bonds?

Answer: 112.5 $

Answer

$112.50
The total semi-annual interest payment is 112.50.Eachbondpays112.50. Each bond pays 45.00 annually (1,000×4.501,000 × 4.50%), which equals 22.50 semi-annually per bond (45.00÷2).Multiplyingby5bondsgivesatotalpaymentof45.00 ÷ 2). Multiplying by 5 bonds gives a total payment of 112.50 received every six months ($22.50 × 5).

Step-by-Step Solution

1
Calculate the total principal (par value) for the 5-bond holding.
$5,000.00 total par value
The investor holds 5 bonds, each with a standard par value of 1,000(1,000 ( 1,000 × 5 = $5,000).
2
Calculate the total annual coupon interest generated by the position.
$225.00 total annual interest
The stated annual coupon rate of 4.50% applies to the total par value (5,000×0.045=5,000 × 0.045 = 225.00).
3
Calculate the semi-annual interest payment amount.
$112.50 received every six months
Corporate bonds pay interest semi-annually (twice per year), so the total annual interest is divided by 2 (225.00÷2=225.00 ÷ 2 = 112.50).

Key Concept

Semi-Annual Coupon Interest Payment Calculation
Estimated Time:1m 30s
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Topics

Debt Securities and Bond Structure

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