Question

5-L. A company sold a $1,000,000 issue of bonds with a 15-year life, paying 4% interest per year. The bonds were sold at par value. If the company paid a selling fee of $50,000 and has an annual expense of $70,256 for mailing and record keeping, what is the true rate of interest that the company is paying for the borrowed money

Answer 1

Answer:

The true interest rate that company paying = 11.75%

Explanation:

The bond amount that is sold by the company = $1000000

The time period for the bonds = 15 years

The rate of interest on bond per year = 4 percent.

The selling fee = $50000

Annual expense for mailing and record maintenance = $70256

Now we have to calculate the true interest rate that the company is paying.

PMT =1000,000 × 4% + 70256 =110256

PV = 1000000 - 50000 = 950000

RATE = RATE(15,110256,-(950000),1000000) (using excel or Finance calculator)  = 11.75%