Question

4. On 1 January 20X8, a borrower arranged a $1,490,000 three-year 2% bond payable, with interest...

4. On 1 January 20X8, a borrower arranged a $1,490,000 three-year 2% bond payable, with interest paid annually each 31 December. There was an upfront fee of $159,311, which was deducted from the cash proceeds of the loan on 1 January 20X8.

Required:

a) Calculate the effective interest rate associated with the loan.

b) What net amount is received on 1 January 20X8?

c) Calculate the interest expense reported by the borrower for each year.

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Homework Answers

Answer #1

Requirement a

Effective interest rate associated with the loan= 2.24%

Requirement b

What net amount is received on 1 January 20X8= $1,330,689.00

Requirement c

Interest expense reported by the borrower for each year= $29,800

Working

(A)

Amount of Loan

$ 1,490,000.00

(B)

Amount Deducted as fees

$      159,311.00

C=A-B

Net Amount received

$ 1,330,689.00

D

Interest to be paid (1490000* 2%)

$        29,800.00

E= D/C*100

Effective interest rate

2.24%
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