X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:
$\begin{array}{lllll}
& \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \
\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\1 / 1 / 10 & & & & \$ 104,212 \
12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \
12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\
12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \
12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \
12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000
\end{array}$
-What is the annual stated interest rate on the bonds?

Question

X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:
$\begin{array}{lllll} 
& \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \
\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\1 / 1 / 10 & & & & \$ 104,212 \
12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \
12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\
12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \
12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \
12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000
\end{array}$
-What is the annual stated interest rate on the bonds?

Quizplus · Accepted Answer

The annual stated interest rate is calculated by dividing the annual cash paid by the carrying value at the beginning of the period. Here, $7,000 / $100,000 = 7%.

X2 Issued Callable Bonds on January 1, 2012 -What Is the Annual Stated Interest Rate on the Bonds