The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? Multiple Choice $41.50 $42.25 $43.15 $85.00

A bond is an instrument that expels the fixed amount of interest to the borrowers or the investors. Bonds are the instruments for the company to raise funds for the company to expand or add some aspect in it. The owners of the bonds are known as the debtholders or creditors or the issuer.

When the face value of bonds is $ 1000, the number of interest payments is $42.25

In the case of a par bond,

Coupon rate = Yield rate

we need to find out the periodic yield that is equal to the semi-annual coupon rate.

To know more about the calculation of the semi-annual rate, refer to the link below:

link

$42.25

Explanation:

In the case of a par bond,

Coupon rate = Yield rate

Since the effective annual yield has been given in the question, we need to find out the periodic yield that will be equal to the semi annual coupon rate.

Therefore, Effective annual rate = (1 + Semi Annual rate)^2 - 1

0.086285 = (1 + Semi Annual rate)^2 - 1

Semi Annual rate = (1.086285)^(1/2) - 1 = 4.225%

Semi annual coupon rate = 4.225%

Semi annual interest payment = 4.225% x 1000 = $42.25

= 0.04225 × 1000 = $42.25

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