On November 1,2012,FastCare sold $5,000,000 of three-year bonds for $4,750,325. From the proceeds,the company paid accounting fees of 50,000.Interest of 5% is payable annually.What is the effective rate of interest to 2 decimal places?

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Quizplus · Accepted Answer

The effective interest rate can be found by considering the net proceeds from the bond sale (total proceeds minus any fees) and the annual interest payments. Here, the net proceeds are $4,750,325 - $50,000 = $4,700,325. The annual interest payment is 5% of the face value, which is $5,000,000 * 5% = $250,000. The effective interest rate is the interest payment divided by the net proceeds, adjusted to an annual rate. Using a financial calculator or an equivalent financial function, you can find that the effective rate that equates the present value of the bond's cash flows (interest payments and repayment of principal) to the net proceeds is approximately 7.30%.

On November 1,2012,FastCare Sold $5,000,000 of Three-Year Bonds for $4,750,325