Use the following information for questions 46 through 48.
Chang Corporation issued $4,000,000 of 9%, ten-year convertible bonds on July 1, 2014 at 96.1 plus accrued interest. The bonds were dated April 1, 2014 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2015, $800,000 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?

Question

Quizplus · Accepted Answer

The effective interest rate is higher than the stated rate because the bonds were issued at a discount (96.1% of face value), which means the actual interest cost to the corporation is higher than the stated 9% rate.

Use the Following Information for Questions 46 Through 48