Question

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2020 at 96.1 plus accrued interest. The bonds were dated April 1, 2020 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2021, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.
What was the effective interest rate on the bonds when they were issued?

a. 9%
b. Above 9%
c. Below 9%
d. Cannot determine from the information given.

Answer 1

Answer:

b. Above 9%

Explanation:

given data

issue = $6,000,000

time=  10 year

rate = 9 %

shares = 500

solution

as we can see that here bond issue at discount rate

and we know that market rate is greater than coupon rate

so that the effective interest rate on the bonds when they were issued above 9 %

so correct answer b. Above 9%