Question

Cheyenne Company sells 8% bonds having a maturity value of $2,400,000 for $2,218,040. The bonds are dated January 1, 2020, and mature January 1, 2025. Interest is payable annually on January 1.

Determine the effective-interest rate. (Round answer to 0 decimal places, e.g. 18%.)

The effective-interest rate

%

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Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 38,548.)

Schedule of Discount Amortization Effective-Interest Method
Year		Interest Payable		Interest Expense		Discount Amortized		Carrying Amount of Bonds
Jan. 1, 2020		$		$		$		$
Dec. 31, 2020
Dec. 31, 2021
Dec. 31, 2022
Dec. 31, 2023
Dec. 31, 2024

Answer 1

Face Value of Bonds = $2,400,000
Issue Value of Bonds = $2,218,040

Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * $2,400,000
Annual Coupon = $192,000

Time to Maturity = 5 years

Let Effective Interest Rate be i%

$2,218,040 = $192,000 * PVA of $1 (i%, 5) + $2,400,000 * PV of $1 (i%, 5)

Using financial calculator:
N = 5
PV = -2218040
PMT = 192000
FV = 2400000

I = 10%

Effective Interest Rate = 10%