Semiannual Payment Bonds with the Same Risk (Aaa)and Maturity (20

question 88

Multiple Choice

Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company's bonds have a simple (not effective annual rate) yield of 9 percent.Your company's treasurer is thinking of issuing at par some $1,000 par value,20-year,quarterly payment bonds.She has asked you to determine what quarterly interest payment,in dollars,the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year,semiannual payment bonds.What would the quarterly interest payment be,in dollars?

• A) $45.00
• B) $25.00
• C) $22.25
• D) $27.50
• E) $23.00

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Definitions:

Cash Flows

The sum total of monetary transfers into and away from a business, crucially impacting its solvent status.

NPV

Net Present Value, a method used in capital budgeting to evaluate the profitability of an investment or project, by calculating the difference between the present value of cash inflows and outflows.

Forecasting Risk

The potential for a significant difference between forecasted and actual results due to assumptions or model inaccuracies.

Projected Fixed Costs

Estimated costs that do not vary with the volume of output or sales, typically including expenses like rent, salaries, and insurance.