Ginny Inc.sold $800,000 of two-year bonds for $701,500 less commissions of $50,500.Interest is of 5.5% is payable semi-annually.What is the effective rate of interest (round to 2 decimal places)?

Question

Quizplus · Accepted Answer

The effective interest rate can be found by considering the actual cash received from the bond sale ($701,500 - $50,500 = $651,000) and the interest payments along with the repayment of principal. The effective rate is higher than the nominal rate of 5.5% due to the discount at which the bonds were sold and the commission costs. Using financial calculators or software to solve for the yield to maturity (effective interest rate) given these cash flows would result in an answer close to 8.43%.

Ginny Incsold $800,000 of Two-Year Bonds for $701,500 Less Commissions of of $50,500.Interest