Question

On January 1, 2018 when the effective interest rate was 12%, Philips Co. issued bonds with a maturity value of $200,000. The stated rate of interest is 12% and the bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this date. If Philips Co. uses IFRS, the effective interest rate will be:
a. cannot be determined based on the information provided.

b. slightly higher than 12%.

c. 12%.

d. slightly lower than 12%.

Answer 1

Answer:

The effective interest rate will be: b. slightly higher than 12%

Explanation:

The effective Interest of a bond is the rate that provides for the risk the issuer provides for the holder of the bond.

IFRS through IAS 32 and IFRS 9 uses the effective rate to charge the interest expense until maturity of the bond.

The stated rate of interest is 12% and the bonds pay interest semi-annually. This then means that the effective interest which is equal to a yearly charge considers two interest charges since the bonds pay twice a year.

Thus the effective interest is 12%× 2 = 24%

Answer 2

Answer:

b. slightly higher than 12%.

Explanation:

As it received 198,000 dollars from the 200,000 face value there is a discount of 2,000

therefore the actual market rate in the bonds will be above par as it will pay 12% like if it receive 200,000 but only get 198,000 in reality thus the cost of ddebt based on the actual amount received is above 12%