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"New York City is issuing $500,000,000 of general obligation bonds paying interest on January 1st and July 1st of each year until maturity. The dated date of the issue is May 1, 2020. The first payment will be made on January 1st, 2021. A bondholder purchases the issue at the offering. How many months of interest will the first and second payments cover?"

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Answer:

  • 8 months for the first interest
  • 6 months for the second

Explanation:

The interest is to be paid semi-annually which means that it accrues for 6 months. However, the bond was issued on May 1, 2020 which is 8 months before the first interest payment on January 1, 2021 so the January payment will have to cover for those months as interest starts to build immediately the bond is purchased.

The second payment on July 1, 2021 will cover the period of 6 months between January 1 and July 1, 2021.

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