Question

On January 1, Year 1, Willette Company sold $240,000 of 6% ten-year bonds. Interest is payable semiannually on June 30 and December 31. The bonds were issued for $180,181, priced to yield 10%. What is the amount of effective interest expense that should be recorded for the six months ended June 30, Year 1? (Round your answer to the nearest whole number.)

Answer 1

9.7%

Step-by-step explanation:

Yield to maturity is the annual rate of return that an investor receives if a bond bond is held until the maturity. it is long term return which is expressed in annual rate.

As per given data

Face value = $240,000

Coupon Payment = $240,000 x 6% x 6/12 = $7,200

Number of periods = n = 10 years x 2 = 20 periods

Yield to maturity = [ C + ( F - P ) / n ] / [ (F + P ) / 2 ]

Yield to maturity = [ $7,200 + ( $240,000 - $180,181 ) / 20 ] / [ ($240,000 + $180,181 ) / 2 ]

Yield to maturity = 4.85% semiannually = 9.70% annually