Question

On 1 January 20X8, a borrower arranged a $1,040,000 three-year 2% bond payable, with interest paid annually each 31 December. There was an upfront fee of $111,197, which was deducted from the cash proceeds of the loan on 1 January 20X8. (PV of $1, PVA of $1, and PVAD of $1.) (Use appropriate factor(s) from the tables provided.)

Required:
1-a. Calculate the effective interest rate associated with the loan. (Round your answer to the nearest whole percentage.)

1-b. What net amount is received on 1 January 20X8?

2. Calculate the interest expense reported by the borrower for each year. (Round your effective interest rate to the nearest whole percentage and your final answers to the nearest whole dollar amount.)

Answer 1

Answer

Answer a

Effective interest rate associated with the loan= 2.24% (20800/928803) Refer Working note.

Answer b

What net amount is received on 1 January 20X8= $1,040,000-111,197

$928,803

Answer c

Interest expense reported by the borrower for each year= $20800 (1040000*2%) Refer Working Note.

Working Note
(A)	Amount of Loan	$     1,040,000
(B)	Amount Deducted as fees	$        111,197
C=A-B	Net Amount received	$        928,803
D	Interest to be paid (1040000* 2%)	$          20,800
E= D/C*100	Effective interest rate	2.24%