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    Investment for Shaid Corporation Convertible Bonds

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    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.

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    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 ...

    Solution Summary

    The expert examines the investment for Shaid Corporation for convertible bonds. The effective interest rates on the bond are determined.