Question

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2018. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Payment Cash Effective Interest Decrease in Balance Outstanding Balance 8,640,967 1 300,000 345,639 45,639 8,686,606 2 300,000 347,464 47,464 8,734,070 3 300,000 349,363 49,363 8,783,433 4 300,000 What is the stated annual rate of interest on the bonds? 8%. 4%. 3%. 6%.

Answer 1

Answer:

The correct answer is 8% annual rate of interest on the bonds.

Explanation:

The effective annual interest rate is 8%

Effective rate if interest (semi-annual) = (Effective interest / Outstanding Balance) x 100

Effective rate if interest (semi-annual) = (345,639 / 8,640,967) x 100

Effective rate if interest (semi-annual) = 0.04 x 100

Effective rate if interest (semi-annual) = 4%

The Effective Annual Rate of Interest = 4% x 2 = 8%