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On November​ 1, 2020, FastCare sold $5,000,000 of​ three-year bonds for $4,750,325. From the​ proceeds, the...

On November​ 1, 2020, FastCare sold $5,000,000 of​ three-year bonds for $4,750,325. From the​ proceeds, the company paid accounting fees of $50,000. Interest of​ 5% is payable annually. What is the effective rate of​ interest? Round to two decimal places.

A.4.69%

B.3.63%

C.7.30%

D.5.00%

Business   Accounting   
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Homework Answers

Answer #1

Solution:

Net proceeds from issue of bond = $4,750,325 - $50,000 = $4,700,325

Annual interest payment = $5,000,000*5% = $250,000

Let effective interest rate = i

At effective interest rate, present value of interest and princiapl payment is equal to proceeds from bonds.

Period Cash Flow Effective Interest Rate (i)
0 4700325 7.30%
1 -250000
2 -250000
3 -5250000

Hence option C is correct.

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