Use the following information to answer the next 4 questions:
Discount-Mart issues $10 million in bonds on January 1,2015.The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year.Below is a partial bond amortization schedule for the bonds:

-What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate. )
A)3%.
B)4%.
C)6%.
D)8%.

Question

Use the following information to answer the next 4 questions:
Discount-Mart issues $10 million in bonds on January 1,2015.The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year.Below is a partial bond amortization schedule for the bonds:
 
-What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate. )
A)3%. 
B)4%. 
C)6%. 
D)8%.

Quizplus · Accepted Answer

The stated annual rate of interest on the bonds is the coupon rate, which is 12%. However, since the interest is paid semiannually, the effective annual rate is less than 12%. Using the bond amortization schedule, we can calculate the total interest payments over the ten years to be $6 million. Therefore, the effective annual rate is approximately 5.74%, which is closest to C)6%.

Use the Following Information to Answer the Next 4 Questions