Prescott Corporation issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds.

Payment Cash Effective Interest Decrease in Balance Outstanding Balance
11,487,747
1 400,000 344,632 55,368 11,432,379
2 400,000 342,971 57,029 11,375,350
3 400,000 341,261 58,739 11,316,611
4 400,000

What is the effective annual rate of interest on the bonds?

Effective Annual Rate of Interest = 8%

Explanation:

given data

bonds =  $1,000

solution

we get here  when here Effective rate  interest is semi-annual that is

Effective rate = (Effective interest ÷ Outstanding Balance) × 100    .........1

put here value and we get

Effective rate  =    × 100

Effective rate = 0.04 × 100

Effective rate  = 4%

so here Effective Annual Rate of Interest = 4% × 2

Effective Annual Rate of Interest = 8%

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