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4 March, 15:11

Discount-Mart issues $19 million in bonds on January 1, 2021. The bonds have a seven-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value 01/01/2021 $ 17,233,953 06/30/2021 $ 950,000 $ 1,034,037 $ 84,037 17,317,990 12/31/2021 950,000 1,039,079 89,079 17,407,069 06/30/2022 950,000 1,044,424 94,424 17,501,493 12/31/2022 950,000 1,050,090 100,090 17,601,583 What is the market annual rate of interest on the bonds

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  1. 4 March, 15:58
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    Answer: 12%

    Explanation:

    The semi annual market rate of interest on the bonds will be the interest expense divided by the carrying value i. e issue price of bond which is then multiplied by 100%. This will be mathematically expressed as:

    = 1,034,037/17,233,953 * 100

    = 0.06 * 100

    = 6%

    This implies that the semi annual market interest rate is 6%.

    Since we are told to calculate the market annual rate of interest on the bonds, we multiply the value of 6% by 2 since 12 months make a year and we used 6 months for the calculation above which is semi annual. This will be:

    = 6% * 2

    = 12%

    Therefore, the market annual rate of interest on the bonds is 12%
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