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Discount-Mart issues $10 million in bonds on January 1, 2021. 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
01/01/2021 $8,640,967
06/30/2021 $300,000 $345,639 $45,639 8,686,606
12/31/2021 300,000 347,464 47,464 8,734,070
06/30/2022 300,000 349,363 49,363 8,783,433
12/31/2022 300,000 351,337 51,337 8,834,770

Required:
What is the stated annual rate of interest on the bonds?
a. 3 %
b. 8%
c. 4%
d. 6%

Sagot :

jepessoa

Answer:

d. 6%

Explanation:

cash paid = $300,000 per coupon

semiannual interest rate = coupon payment / face value = $300,000 / $10,000,000 = 0.03 = 3%

stated annual interest rate = semiannual interest rate x 2 = 3% x 2 = 6%

the interest expense is higher because it includes the amortization of bond discount

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