Question

Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date Cash Paid Interest Expense Decrease in Carrying Value Carrying Value 01/01/2021 $ 5,500,000 06/30/2021 $ 250,000 $ 220,000 $ 30,000 5,470,000 12/31/2021 250,000 218,800 31,200 5,438,800 What is the stated annual interest rate?

Answer 1

Answer:

10%

Explanation:

Cash paid as semiannual coupon payment is $250,000

semiannual annual interest rate=semiannual coupon payment/face value of the bond.

The face value of the bond is $5,000,000

stated semiannual rate of interest=$250,000/$5,000,000=5%

Stated annual rate of interest =semiannual rate of interest *2

stated annual rate of interest=5%*2=10%

The coupon rate quoted on Tomkin Library Systems is 10% per year

yield to maturity =$220,000/$5,500,000*2=8%

Since the coupon rate is higher than the yield ,the bond was issued at a premium of $500,000 above its face value of $5 million