Question

How do I determine the effective interest rate. If you could guide me through the remainder fo the assignment as well, that would be greatly appreciated, thank you.

Exercise 147 Shamrock Company sells 8% bonds having a matunty value of $1,700,000 for $1,511,507. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1, Determine the ertective-interest rate. (Round answer to 0 decinal places, e.g. 18%.) The effective-interest rate Sat up a schedule of Interest expense and discount amortzatlon under the effective-Interest mathod. (Round Intermedlate calculatlons to 6 declmal places, e.g. 1.251247 and final answer to o declmal places, e.g. 38,548.) Schedule of Discount Amortization Effective-Interest Method Cash Paid Interest Expense Discount Amortized Carrying Amount of Bonds Year an. 1, 2017 Jan, 1, 2018 Jan. 1, 2019 Jan. 1. 2020 an. 1, 2021 a, 1, 2022

Answer 1

Calculate the Effective Interest Rate:

Coupon Amount of Bonds = Face Value or Maturity Value of Bonds*Coupon Rate

Where,

Coupon rate = 8%

Face value or Maturity Value of Bonds = $1,700,000

Hence, Coupon amount of Bonds = $1,700,000*8/100

= $136,000

Effective Interest Rate = {Coupon Amount + (Face Value of Bonds- Current Price of Bonds)/Period}/{(0.6*Current Price of Bonds) + (0.4*Face Value of Bonds)}

Where

Coupon amount = $136,000

Face value or Maturity Value of Bonds = $1,700,000

Current Price of Bonds = $1,511,507

Period or Term = 5 Years (From 1st of Jan. 2017 to 1st of Jan. 2022)

Effective Interest Rate = {$136,000 + ($1,700,000 - $1,511,507) / 5 Years} / {(0.6*$1,511,507) + (0.4*$1,700,000)}

= ($136,000 + $37,698.6) / ($906,904.2 + $680,000)

= $173,698.6 / $1,586,904.2

= 0.1094575 or 11% (rounded to 0 decimals)

Therefore, effective interest rate is 11% per annum.

Discount on bonds =  Face value or Maturity Value of Bonds - Current Price of Bonds

= $1,700,000 - $1,511,507

= $188,493

Schedule of Interest expense and discount amortization under Effective-Interest Method: