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Difficulty: MediumDebt Securities and Bond Structure

An investor purchases 8 corporate bonds in the secondary market at a discounted price of 95 (950perbond).Eachbondhasaparvalueof950 per bond). Each bond has a par value of 1,000 and carries a stated coupon rate of 6.25% payable semi-annually. What is the total dollar amount of interest the investor will receive across all 8 bonds in a single semi-annual payment?

Answer: 250 USD

Answer

The total dollar amount of interest received in a single semi-annual payment is $250.
Bond coupon payments are always calculated by multiplying the annual coupon rate by the par value (1,000perbond),irrespectiveofsecondarymarketprices.For8bonds,totalparvalueequals1,000 per bond), irrespective of secondary market prices. For 8 bonds, total par value equals 8,000. At a 6.25% annual coupon rate, the total annual interest payment is 8,000×0.0625=8,000 × 0.0625 = 500. Because corporate bonds pay interest semi-annually, each individual payment equals half of the annual total (500/2=500 / 2 = 250).

Step-by-Step Solution

1
Determine total par value of the holding
$8,000 total par value
Bond coupon payments are determined using par value ($1,000 per bond) rather than secondary market purchase price.
2
Calculate total annual interest income
$500 total annual interest
Multiply total par value (8,000)bythestatedannualcouponrateof6.258,000) by the stated annual coupon rate of 6.25% ( 8,000 × 0.0625).
3
Calculate single semi-annual payment amount
$250 semi-annual payment
Corporate bonds pay interest semi-annually (twice per year), so the total annual interest is divided by 2.

Key Concept

Bond coupon payments are calculated strictly on face (par) value rather than secondary market price, and standard corporate bond interest is paid semi-annually.
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Topics

Debt Securities and Bond Structure

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