Question

Adonis Corporation issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adonis received $206,948 in cash proceeds. Which of the following statements is true?A. Adidas must pay $200,000 at maturity and no interest payments.B. Adidas must pay $206,948 at maturity and no interest payments.C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

Answer 1

Answer:

Option (C) is correct.

Explanation:

Issue price of bond (Par value) = $200,000

Interest is paid semiannually,

Annual interest rate = 8%

Annual interest amount to be = Par value of bond × Annual interest rate

                                                 = $200,000 × 8%

                                                 = $16,000

Semiannual interest payment = Annual interest amount ÷ 2

                                                 = $16,000 ÷ 2

                                                 = $8,000

Therefore,

Repayment at maturity:

Face value of Bond = $200,000

Final Semiannual interest payment = $8,000

Hence, Adonis must pay $200,000 at maturity plus 20 interest payments of $8,000 each.