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Finance - Investment

4. CPA Exam - Shaid Corporation issued $2,000,000 of 6%, 10-year convertible bonds on June 1, 1993 at 98 plus accrued interest. The bonds were dated April 1, 1993, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis.

On April 1, 1994, $500,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

What was the effective interest rate on the bonds when they were issued?
a) 6%
b) Above 6%
c) Below 6%
d) Cannot be determined from the information given.

Solution Preview

The FV = $500,000 / 500 = $1,000
PV = $980
Payment = semiannual Accrued interest = 6%*1000/2 = $30 each period.
If the Accrued interest is paid ...

$2.19