Multiple Choice
Which of the following represents a method of long-term debt financing for a corporation?
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7. Receivables and Investments
Introduction to Investments in Securities
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A bondholder that owns a \$1,000, 10\%, 10-year bond has:
A
Ownership of \$1,000 in company stock.
B
The right to receive \$100 in interest each year for 10 years, plus \$1,000 at maturity.
C
A bond that matures in 1 year with a 10\% interest rate.
D
The obligation to pay \$100 in interest each year for 10 years.
Verified step by step guidance1
Step 1: Understand the nature of a bond. A bond is a debt instrument issued by a company or government to raise funds. The bondholder is essentially lending money to the issuer and is entitled to periodic interest payments (coupon payments) and the repayment of the principal amount at maturity.
Step 2: Analyze the bond details provided. The bond has a face value of \$1,000, a coupon rate of 10%, and a maturity period of 10 years. The bondholder owns this bond, meaning they are entitled to the benefits associated with it.
Step 3: Calculate the annual interest payment (coupon payment). The formula for calculating the coupon payment is: \( \text{Coupon Payment} = \text{Face Value} \times \text{Coupon Rate} \). Substituting the values: \( \text{Coupon Payment} = 1000 \times 0.10 \). This gives the annual interest payment.
Step 4: Determine the total interest payments over the bond's life. Since the bond matures in 10 years, the bondholder will receive the annual interest payment for 10 years. Multiply the annual interest payment by the number of years: \( \text{Total Interest Payments} = \text{Coupon Payment} \times \text{Years to Maturity} \).
Step 5: Understand the maturity payment. At the end of the 10-year period, the bondholder will receive the face value of the bond (\$1,000) in addition to the interest payments received over the bond's life. This is the repayment of the principal amount.
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