On April 1, 2020, a company sold $3,500,000 of ten year, 6% bonds for $2,222,400. From the proceeds, the company paid $200,000 sales commission. Interest is payable semi-annually on April 1 and October 1. What is the effective rate of interest (round to 2 decimal places)?

Question

Quizplus · Accepted Answer

The effective rate of interest is the annual rate that would produce the same total amount of interest over the life of the bond as the actual semi-annual rate. To calculate the effective rate, we need to use the following formula:Effective rate = (1 + (Stated rate / 2)) ^ 2 - 1In this case, the stated rate is 6% and the bond is semi-annual, so the effective rate is:Effective rate = (1 + (0.06 / 2)) ^ 2 - 1 = 0.0698 or 6.98%Therefore, the effective rate of interest is 6.98%.

On April 1, 2020, a Company Sold $3,500,000 of Ten