McCourt Investment Advisors purchased newly issued bonds on October 1, 2005, paying $108,983. The bonds had a face value of $100,000, maturing on September 30, 2010, and pay interest semiannually on March 31 and September 30. The stated interest rate is 6%. What is the effective interest rate?

Question

Quizplus · Accepted Answer

Because the bonds were issued at a premium, we know that the effective interest rate is lower than the stated rate. This eliminates answers c. and d. Our tables do not allow us to compute the present value of the interest at 5% because our table doesn't include a 2.5% column. This leaves 4% as a possible solution. The following computation of the present value of the future cash flows at 4% arrives at our purchase price, proving that 4% is the effective rate. 11eb49ea_73ca_d6cf_ae87_351cd9ebbf72_TB5406_00

McCourt Investment Advisors Purchased Newly Issued Bonds on October 1