How is the bond interest payment calculated?

How is the bond interest payment calculated?

• A. Amount of bond × (interest rate ÷ interest periods per year)
• B. Amount of bond × market rate
• C. Par value × coupon rate × periods per year
• D. Interest expense ÷ number of days in year

Answer: (A)

The cash interest payment for each period is found by applying the bond’s coupon rate to its face value and then dividing by how many payment periods occur in a year. In other words, per-period interest = par value × (annual coupon rate) ÷ number of periods per year. This is why the formula uses the amount of the bond times the rate divided by the periods per year. For example, a $1,000 bond with a 6% annual coupon and semiannual payments pays $1,000 × 0.06 ÷ 2 = $30 each period. The market rate affects price/yield, not the fixed cash coupon per period; multiplying by periods per year without dividing would give the annual coupon, not the per-period payment, and using days in a year isn’t the standard method for fixed-rate bond coupons.

The cash interest payment for each period is found by applying the bond’s coupon rate to its face value and then dividing by how many payment periods occur in a year. In other words, per-period interest = par value × (annual coupon rate) ÷ number of periods per year. This is why the formula uses the amount of the bond times the rate divided by the periods per year. For example, a $1,000 bond with a 6% annual coupon and semiannual payments pays $1,000 × 0.06 ÷ 2 = $30 each period. The market rate affects price/yield, not the fixed cash coupon per period; multiplying by periods per year without dividing would give the annual coupon, not the per-period payment, and using days in a year isn’t the standard method for fixed-rate bond coupons.