Question

ABC issues $10 million in bonds on January 1, 2018. The bonds have a ten-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 1/1/2018 $8,640,967 6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464 47,464 8,734,070 6/30/2019 300,000 349,363 49,363 8,783,433 12/31/2019 300,000 351,337 51,337 8,834,770 What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate. (round to nearest whole percentage, just put in the number with no %)

Answer 1

Answer:

6%

Explanation:

Calculation of the stated annual rate of interest on the bonds

Using this formula

Annual rate of interest = (Cash paid /Bonds Amount)× 2 payments per year

Where,

Cash paid=$300,000

Bonds amount =$10,000,000

Let plug in the formula

Annual rate of interest=($300,000/$10,000,000) × 2 payments per year

Annual rate of interest= 0.03×2 payments per year =6%

Note the 2 payment per year is June 30 and December 31

Therefore stated annual rate of interest on the bonds will be 6%