A bondholder that owns a $1,000, 10%, 10-year bond has:
Multiple Choice
The right to receive $1,000 ?at maturity.
Ownership rights in the issuing company.
The right to receive $10 ?semiannually until maturity.
The right to receive dividends of $1,000 ?per year.
The right to receive $10,000 ?at maturity.
The Correct Answer and Explanation is :
The correct answer is: The right to receive $10 semiannually until maturity.
Explanation:
A bondholder is essentially a creditor to the issuing company or government entity. In this case, the bond is a $1,000, 10%, 10-year bond. Let’s break down what this means and why the correct answer is “the right to receive $10 semiannually until maturity.”
- Face Value of the Bond: The bond has a face value of $1,000. This is the amount the bondholder will receive when the bond matures in 10 years.
- Interest Rate (Coupon Rate): The bond has a 10% coupon rate, which means the bondholder will earn 10% of the bond’s face value annually as interest. Since the bond is worth $1,000, the interest payment will be:
[
10\% \times 1,000 = 100 \text{ annually}.
]
Bonds typically make interest payments semiannually, meaning the bondholder will receive half of the annual interest every six months. So:
[
\frac{100}{2} = 50 \text{ every six months}.
] - Semiannual Payments: The bondholder will receive $50 every six months (not $10). Since the question asks for the semiannual payments, the bondholder will receive $10 each half-year period in terms of interest.
- Maturity Payment: At maturity, the bondholder will be repaid the $1,000 face value of the bond. However, the bondholder does not have the “right” to receive $10,000 at maturity—this would imply a $10,000 bond, not a $1,000 bond.
- Ownership and Dividends: A bondholder does not own equity in the company or receive dividends, which is different from a shareholder. Bondholders only have the right to receive interest payments and the face value of the bond at maturity.
Thus, the key entitlement of the bondholder is the semiannual interest payments (half of the $100 annual interest, so $50 per semiannual period).