Question

Discount-Mart issues $19 million in bonds on January 1, 2021. The bonds have a seven-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value 01/01/2021 $ 17,233,953 06/30/2021 $ 950,000 $ 1,034,037 $ 84,037 17,317,990 12/31/2021 950,000 1,039,079 89,079 17,407,069 06/30/2022 950,000 1,044,424 94,424 17,501,493 12/31/2022 950,000 1,050,090 100,090 17,601,583 What is the market annual rate of interest on the bonds

Answer 1

Answer: 12%

Explanation:

The semi annual market rate of interest on the bonds will be the interest expense divided by the carrying value i.e issue price of bond which is then multiplied by 100%. This will be mathematically expressed as:

= 1,034,037/17,233,953 × 100

= 0.06 × 100

= 6%

This implies that the semi annual market interest rate is 6%.

Since we are told to calculate the market annual rate of interest on the bonds, we multiply the value of 6% by 2 since 12 months make a year and we used 6 months for the calculation above which is semi annual. This will be:

= 6% × 2

= 12%

Therefore, the market annual rate of interest on the bonds is 12%