Auerbach Inc. issued 8% bonds on October 1, 2016. The bonds have a maturity date
ID: 2484814 • Letter: A
Question
Auerbach Inc. issued 8% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $250 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 10%.
How much cash interest does Auerbach pay on March 31, 2017?
Auerbach Inc. issued 8% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $250 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 10%.
How much cash interest does Auerbach pay on March 31, 2017?
Explanation / Answer
The Cash Interest payment is based on face value of the bond multiplied by the coupon (contractual ) rate. The effective interest rate is calculated based on interest payment divided by the market value of the bond (fluctuations in the price of bond)
Cash Interest payment per annum = $ 250 Million x 8% = $ 20 Million
Cash Interest payment semi annually = $ 20 Million / 2 = $ 10 Million
Accordingly Auerbach has to pay $ 10 Million on March 2017
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