Question

A corporate entity issues 1,000, \( 9% \) Debentures of \$100 each at a premium of \( 10% \). What is the total annual interest obligation that the company must pay on these debentures?

• A. \$9,000
• B. \$9,900
• C. \$900
• D. \$10,000

Hint:

Debenture interest rates are always applied directly to the face value of the security. Issue premiums or discounts affect cash proceeds at launch, but do not alter the company's fixed annual interest obligations.

Answer 1

The Correct Option is A

Concept: Interest on debentures is a fixed financial charge calculated strictly based on the nominal face value of the securities, completely ignoring any issue premiums or market discounts. \[ \text{Interest Expense} = \text{Total Nominal Face Value} \times \text{Stated Interest Rate} \]

Step 1: Calculate the total nominal face value of the issue.
Multiply the total number of issued debentures by their nominal face value: \[ \text{Total Face Value} = 1,000 \text{ debentures} \times \$100 = \$100,000 \]

Step 2: Calculate annual interest using the nominal rate.{} The stated interest rate for this issue is \( 9% \). Apply this percentage to the total face value, ignoring the 10% premium: \[ \text{Annual Interest} = \$100,000 \times \frac{9}{100} = \$9,000 \]