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

Answer: $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