A five-year, $500,000 bond was issued on January 1, Year 1. The stated rate of interest was 8%, and the effective rate of interest was 10%. The interest is paid semiannually. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

The effective rate of interest of 10% is higher than the stated rate of interest of 8%. This implies that the bond was issued at a discount. 
The semiannual interest payment can be calculated using the formula: Interest Payment = Face Value x Stated Rate / 2
= $500,000 x 8% / 2 = $20,000
Therefore, each semiannual cash payment is $20,000.

A Five-Year, $500,000 Bond Was Issued on January 1, Year