Question

X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Decrease in Carrying Value Interest Expense Cash Paid Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 $8,320 8,320 8,320 8,320 $7,578 7,527 7,471 7,412 $ 742 793 849 908 972 Carrying Value $ 108,264 107,522 106,729 105,880 104,972 104,000 8,320 7,348 What is the annual stated interest rate on the bonds? Multiple Choice o a.3.5% b. 4% c.7% d.8%.

Answer 1

The annual stated interest rate on the bonds is 6.85%.

Step-by-step explanation:

To calculate the annual stated interest rate on the bonds, we need to examine the amortization schedule provided. In Year 1, the decrease in carrying value is $8,320 and the interest expense is $7,578.

So, the interest payment is the difference between these two values: $8,320 - $7,578 = $742.

To calculate the annual stated interest rate, we divide the interest payment by the carrying value at the beginning of the year: $742 / $108,264 = 0.00685, or 0.685%.

However, since the interest is paid annually, we need to multiply this rate by 100 to express it as a percentage.

Therefore, the annual stated interest rate on the bonds is 0.685% x 100 = 6.85%.