On May 5, 2020, Bennix sold $1,000,000 of five-year, 3% bonds for $900,500. From the proceeds, the company paid fees of 100,000. Interest is payable semi-annually on May 5 and November 5. What is the effective rate of interest (round to 2 decimal places)?
A)3.00%
B)3.72 %
C)3.95%
D)6.27%

Question

Quizplus · Accepted Answer

The effective rate of interest is the annual rate of interest that would produce the same total amount of interest over the life of the bond as the actual interest payments. To calculate the effective rate of interest, we need to use the following formula:Effective rate of interest = (Interest payment / Proceeds) x (360 / Days to maturity)In this case, the interest payment is $15,000 (3% of $1,000,000), the proceeds are $900,500, and the days to maturity is 1,825 (5 years x 365 days). Plugging these values into the formula, we get:Effective rate of interest = (15,000 / 900,500) x (360 / 1,825) = 3.95%Therefore, the effective rate of interest is 3.95%.

On May 5, 2020, Bennix Sold $1,000,000 of Five-Year, 3