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9 July, 07:58

On January 1, 2018 when the effective interest rate was 12%, Philips Co. issued bonds with a maturity value of $200,000. The stated rate of interest is 12% and the bonds pay interest semi-annually. Philips Co. paid $2,000 in bond issue costs on this date. If Philips Co. uses IFRS, the effective interest rate will be:

a. cannot be determined based on the information provided.

b. slightly higher than 12%.

c. 12%.

d. slightly lower than 12%.

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Answers (2)
  1. 9 July, 08:00
    0
    b. slightly higher than 12%.

    Explanation:

    As it received 198,000 dollars from the 200,000 face value there is a discount of 2,000

    therefore the actual market rate in the bonds will be above par as it will pay 12% like if it receive 200,000 but only get 198,000 in reality thus the cost of ddebt based on the actual amount received is above 12%
  2. 9 July, 08:00
    0
    The effective interest rate will be: b. slightly higher than 12%

    Explanation:

    The effective Interest of a bond is the rate that provides for the risk the issuer provides for the holder of the bond.

    IFRS through IAS 32 and IFRS 9 uses the effective rate to charge the interest expense until maturity of the bond.

    The stated rate of interest is 12% and the bonds pay interest semi-annually. This then means that the effective interest which is equal to a yearly charge considers two interest charges since the bonds pay twice a year.

    Thus the effective interest is 12% * 2 = 24%
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