Question

Sykora Corp. sells $540,000 of bonds to private investors. The bonds are due in 5 years, have a 6% coupon rate and interest is paid semiannually. Sykora received $490,222 for the bonds at issuance.

The effective rate on these bonds is:

Select one:

a. 4%

b. 8%

c. None of these are correct.

d. 10%

e. 5%

Answer 1

The Answer is c. None of these are correct.

Explanation:

1) Around 4.14 % per period and 8.28% [ 4.14% * 2 ] per annum effective rate is the effective rate of these bonds

2) If we round off the effective rate to nearest, the answer will be 8%.

Working:

Present value of interest payments	$      130,486
[$540,000*3%* 8.0587 PV annuity factor (4.14%, 5 years, semi-annual bond)]
Present value of the face value	$      359,930
[$540,000 x 0.6672 PV ordinary factor (4.14%, 5 years)]
Total present value	$      490,416