The total interest expense on a $300,000,10 percent,10-year bond issued at 95 would be

Question

Quizplus · Accepted Answer

The bond is issued at a discount, so the effective annual interest rate is higher than 10%. 
The calculation of the effective annual interest rate: 
Effective interest rate = (annual interest payment / bond price) * 100%
= (0.10 * $300,000 / $285,000) * 100%
= 10.53%
The total interest expense over 10 years is calculated as follows: 
Total interest expense = annual interest payment * number of years
= 0.10 * $300,000 * 10
= $300,000
So, the answer is (D) $315,000, which is the total interest expense at the effective annual interest rate of 10.53% for 10 years.

The Total Interest Expense on a $300,000,10 Percent,10-Year Bond Issued