Zhang Company,an IFRS company,sold $1,000,000 of 6%,3-year bonds on January 1,2016.The bonds pay semi-annual interest each June 30 and December 31.It cost the company $30,000 in bond issue costs. What is the effective semi-annual interest rate for the bonds?

Question

Quizplus · Accepted Answer

To calculate the effective semi-annual interest rate, we need to first calculate the present value of the bond. The bond issue costs of $30,000 need to be deducted from the bond proceeds of $1,000,000, leaving us with a net proceeds of $970,000. Using this amount, we can use the PV annuity formula to calculate the semi-annual interest payments:

PV = (C x (1 - (1+r)^-n)) / r + (FV / (1+r)^n)

where PV = present value of the bond, C = semi-annual interest payment, r = semi-annual interest rate, n= number of semi-annual periods, and FV = face value of the bond.

Plugging in the given values, we get:

$970,000 = (30,000 x (1 - (1+r)^-6)) / r + (1,000,000 / (1+r)^6)

Solving for r using trial and error or a financial calculator, we get an effective semi-annual interest rate of 3.56%. Therefore, the best choice is C.

Zhang Company,an IFRS Company,sold $1,000,000 of 6%,3-Year Bonds on January