• 100% Satisfaction Guarantee
JKCPA, CPA
Category: Finance
Satisfied Customers: 5882
Experience:  Bachelors degree and CPA with Accounting experience.
23848519
JKCPA is online now

# For an Accountant:How do I calculate the Effective Interest

### Resolved Question:

For an Accountant: How do I calculate the Effective Interest Rate using Table 6-2: Present Value of a Single Sum (for the Principal) and Table 6-4: Present Value of an Ordinary Annuity of 1 (for the Interest) using the trial and error method? Problem: A Company sells 10% bonds having a Maturity Value of \$3,000,000 for a carrying value of \$2,783,724. The bonds are dated 1/1/2012 and have a maturity date of 5 years. Interest is payable annually on January 1. I do not understand how they arrived at the discounted value of the principal (\$1,702,290) and the discounted value of the interest (\$1,081,434) to equal the purchase price of \$2,783,724.

Submitted: 2 years ago.
Category: Finance
Expert:  JKCPA replied 2 years ago.
Hi,

Thanks for the question.

For the principle, take the discounted value of the principal and divide by the maturity value: 1,702,290 / 3,000,000 = 0.56743. You then search in Table 6-2 for 0.56743. This factor can be found under the 12% column at the 5th period row.

For the interest, the annual interest payment would be 10% x \$3,000,000 = \$300,000. Then take the discounted value of the interest and divide by the annual interest payment. This is 1,081,434 / 300,000 = 3.60478. In table 6-4, this factor also can be found under the 12% column at the 5th period row.

Therefore, we can state that the effective interest rate is 12%.

Hope this helps!
Customer: replied 2 years ago.

How do you first find the discounted value of the principal? How do you then find the discounted value of the interest?

Your answer was very helpful but I am not sure of the above. Can you further assist me? Thank you.

Expert:  JKCPA replied 2 years ago.
Hi,

The discounted value of the principle can be found by using the formula for the present value of a single sum = Future value x (1 + i)^-n. So this would be \$3,000,000 / (1 + 0.12)^5 = 3,000,000 / (1.76234) = 1,702,282 (difference from 1,702,290 is due to rounding).

The discounted value of the interest can be found by using the formula for the present value of an ordinary annuity = interest payment x (1 - (1/(1 + i)^n) / i = \$300,000 x (1 - (1/(1+0.12)^5)/0.12 = 300,000 x (1 - (1/1.76234)/0.12) = 300,000 x (1 - 0.56743)/0.12 = 300,000 x (0.43257/0.12) = 300,000 x 3.60475 = 1,081,425 (difference from 1,081,434 is due to rounding).

You can also use the present value formula in Excel to find these amounts if you prefer.

Customer: replied 2 years ago.

Thank you for your additional effort. I will be putting this information to good use shortly. Thanks again.

Expert:  JKCPA replied 2 years ago.
You're welcome. I hope this helps. When you are ready, please take a moment to rate my service. I'd appreciate it as this is the only way I can receive credit for my work. Thanks!!!
JKCPA, CPA
Category: Finance
Satisfied Customers: 5882
Experience: Bachelors degree and CPA with Accounting experience.

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

### What Customers are Saying:

• I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Previous | Next >
• I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
• I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
• Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
• Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
• Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
• This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
• Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA

### Meet The Experts:

#### Satisfied Customers:

2489
Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
< Last | Next >

#### Satisfied Customers:

2489
Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years

### Megan C

#### Satisfied Customers:

2210
Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

### Manal Elkhoshkhany

#### Satisfied Customers:

1905
More than 5000 online tutoring sessions.

### JKCPA

#### Satisfied Customers:

843
Bachelors degree and CPA with Accounting experience.

### Eric

#### Satisfied Customers:

559
Loan servicing, counseling and real estate expert. Foreclosure Expert and Financial Planner.

### R. Klein, EA

#### Satisfied Customers:

480
TurboTax Expert. QuickBooks Certified Pro Advisor