On April 15,2017,Cando Inc.sold $10,000,000 of five-year,3% bonds for $9,972,469.
From the proceeds,Cando paid its investment bank a $200,000 sales commission.
Interest is payable semi-annually on April 15 and October 15.What is the effective rate of interest?
A)1.53%
B)1.75 %
C)3.00%
D)3.50%

Question

Quizplus · Accepted Answer

To find the effective rate of interest on the bond, we need to take into account the sales commission paid to the investment bank.

The net proceeds from the sale of the bonds can be calculated as follows:

Net proceeds = sale price - sales commission 
Net proceeds = $9,972,469 - $200,000 
Net proceeds = $9,772,469

Next, we can use the net proceeds to calculate the yield to maturity (YTM) on the bond. The YTM is the rate that equates the present value of all future cash flows (interest payments and principal repayment) to the net proceeds of the bond.

Using a financial calculator or Excel function, the YTM on the bond is approximately 1.75%. This is the effective rate of interest on the bond after taking into account the sales commission.

Therefore, the correct answer is B) 1.75%.