Windsor Company sells 8% bonds having a maturity value of $1,400,000 for $1,244,771. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.
Determine the effective-interest rate. (Round answer
to 0 decimal places, e.g. 18%.)
1)The effective-interest rate:- 2)Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.) from 2017 to 2021 cashpaid interst expense discount amortized carrying amount of bond |
Answer 1.
Face Value of Bonds = $1,400,000
Current Value of Bonds = $1,244,771
Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * $1,400,000
Annual Coupon = $112,000
Time to Maturity = 5 years
Let Effective Interest Rate be i%
$1,244,771 = $112,000 * PVA of $1 (i%, 5) + $1,400,000 * PV of $1 (i%, 5)
Using financial calculator:
N = 5
PV = -1244771
PMT = 112000
FV = 1400000
I = 11%
Effective Interest Rate = 11%
Answer 2.
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