Callable Bonds

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evonnemariano

Mar 16, 2008, 11:36 AM

I am stuck on bonds! I can figure out the entry for the issuance of the bond, but I don't understand how to come up with the semiannual interest payment. I know the formula for computing interest but this particular question has me stumped:

How do I compute the semiannual interest payment on a 19,000,000, seven-year, 12% callable bond dated July 1, 2007, effective rate of 10%?

HELP!!!!:confused:

morgaine300

Mar 20, 2008, 12:08 AM

The fact that it's callable is irrelevant to the interest payment, so don't let that confuse you. And the effective rate is also irrelevant. That is what the market is paying for a similar investment. That's there so you can figure out the present value of the bonds.

But the interest paid is based on the contract rate of 12%. Since it's semi-annual, that means 6% for each payment. So you're paying 6% of 19,000,000 semi-annually. That's all there is.