Discount-Mart issues $19 million in bonds on January 1, 2021. The bonds have a seven-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value 01/01/2021 $ 17,233,953 06/30/2021 $ 950,000 $ 1,034,037 $ 84,037 17,317,990 12/31/2021 950,000 1,039,079 89,079 17,407,069 06/30/2022 950,000 1,044,424 94,424 17,501,493 12/31/2022 950,000 1,050,090 100,090 17,601,583 What is the market annual rate of interest on the bonds

Question

Alicia White

Business

28 August, 12:03

Discount-Mart issues $19 million in bonds on January 1, 2021. The bonds have a seven-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value 01/01/2021 $ 17,233,953 06/30/2021 $ 950,000 $ 1,034,037 $ 84,037 17,317,990 12/31/2021 950,000 1,039,079 89,079 17,407,069 06/30/2022 950,000 1,044,424 94,424 17,501,493 12/31/2022 950,000 1,050,090 100,090 17,601,583 What is the market annual rate of interest on the bonds

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Answers (1)

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Sammy Ferrell · Answer 1

Answer: 12%

Explanation:

The semi annual market rate of interest on the bonds will be the interest expense divided by the carrying value i. e issue price of bond which is then multiplied by 100%. This will be mathematically expressed as:

= 1,034,037/17,233,953 * 100

= 0.06 * 100

= 6%

This implies that the semi annual market interest rate is 6%.

Since we are told to calculate the market annual rate of interest on the bonds, we multiply the value of 6% by 2 since 12 months make a year and we used 6 months for the calculation above which is semi annual. This will be:

= 6% * 2

= 12%

Therefore, the market annual rate of interest on the bonds is 12%